A World Bank Group
Flagship Report

JANUARY 2017

GlobalEconomic
Prospects
Weak Investment inUncertain Times

A World Bank Group
Flagship Report

JANUARY 2017

Weak Investment inUncertain Times© 2017 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington, DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org
Some rights reserved
1 2 3 4 19 18 17 16This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions
expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments
they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World
Bank, all of which are specifically reserved.
Rights and Permissions

This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/
licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt thiswork, including for commercial purposes, under the following conditions:
Attribution—Please cite the work as follows: World Bank Group. 2017. Global Economic Prospects, January 2017 Weak Investment inUncertain Times. Washington, DC: World Bank. doi:10.1596/978-1-4648-1016-9. License: Creative Commons Attribution CC BY
3.0 IGO
Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation
was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable
for any content or error in this translation.
Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is anadaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author
or authors of the adaptation and are not endorsed by The World Bank.
Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The
World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work
will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you
wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and toobtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images.
All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW,
Washington, DC 20433, USA; e-mail: pubrights@worldbank.org.
Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The
World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work
will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you
wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and toobtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images.
All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street
NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.
ISBN (paper): 978-1-4648-1016-9
ISBN (electronic): 978-1-4648-1017-6
DOI: 10.1596/978-1-4648-1016-9
Cover design: Bill Pragluski (Critical Stages).
The cutoff date for the data used in this report was December 15, 2016.

Summary of Contents
Chapter 1

Global Outlook: Subdued Growth, Shifting Policies, Heightened Uncertainty.......... 1

Special Focus

The U.S. Economy and the World .......................................................................... 57

Chapter 2

Regional Outlooks .................................................................................................... 81

Chapter 3

Weak Investment in Uncertain Times: Causes, Implications andPolicy Responses .................................................................................................... 191

Boxes

Box 1.1 Low-income countries: Recent developments and outlook ........................... 19
Box 1.2 Regional perspectives: Recent developments and outlook ............................. 26
Box 2.1.1 Investment developments and outlook: East Asia and Pacific ..................... 93
Box 2.2.1 Recent investment slowdown: Europe and Central Asia ........................... 109
Box 2.3.1 Recent investment slowdown: Latin America and the Caribbean.............. 126
Box 2.4.1 Recent investment slowdown: Middle East and North Africa ................... 142
Box 2.5.1 Recent investment slowdown: South Asia ............................................... 159
Box 2.6.1 Recent investment slowdown: Sub-Saharan Africa .................................. 173
Box 3.1 Investment-less credit booms ...................................................................... 203
Box 3.2 Implications of rising uncertainty for investment in EMDEs ...................... 209
Box 3.3 Investment slowdown in China .................................................................. 214
Box 3.4 Interactions between public and private investment ................................... 221

iii

Table of Contents
Chapter 1

Global Outlook: Subdued Growth, Shifting Policies, Heightened Uncertainty .......... 1
Summary .................................................................................................................... 3
Major economies: Recent developments and outlook ................................................... 7
Global trends ............................................................................................................. 12
Emerging and developing economies: Recent developments and outlook ................... 16
Outlook ..................................................................................................................... 25
Risks to the outlook ................................................................................................... 28
Policy challenges ........................................................................................................ 37
References ................................................................................................................. 48
Box 1.1 Low-income countries: Recent developments and outlook ........................... 19
Box 1.2 Regional perspectives: Recent developments and outlook ............................. 26

Special Focus

The U.S. Economy and the World .......................................................................... 57
Introduction .............................................................................................................. 59
Linkages between the United States and the World.................................................... 60
Synchronization of U.S. and global cycles .................................................................. 63
Spillovers from the United States to the global economy ........................................... 65
Spillovers to the United States from the global economy ........................................... 68
Conclusion ................................................................................................................ 70
Annex SF.1 Cyclical spillovers.................................................................................... 73
Annex SF.2 Fiscal policy simulations ......................................................................... 74
References .................................................................................................................. 75

Chapter 2

Regional Outlooks .................................................................................................... 81
East Asia and Pacific ................................................................................................ 83
Recent developments .............................................................................................. 83
Outlook.................................................................................................................. 85
Risks ....................................................................................................................... 87
Policy challenges ..................................................................................................... 88
Box 2.1.1 Investment developments and outlook: East Asia and Pacific .................. 93v

Europe and Central Asia ........................................................................................... 99
Recent developments .............................................................................................. 99
Outlook................................................................................................................ 101
Risks .................................................................................................................... 103
Policy challenges ................................................................................................... 104
Box 2.2.1 Recent investment slowdown: Europe and Central Asia........................ 109
Latin America and the Caribbean ........................................................................... 115
Recent developments ............................................................................................ 115
Outlook................................................................................................................ 119
Risks..................................................................................................................... 121
Policy challenges ................................................................................................... 121
Box 2.3.1 Recent investment slowdown: Latin America and the Caribbean .......... 126
Middle East and North Africa ................................................................................ 131
Recent developments ............................................................................................ 131
Outlook................................................................................................................ 135
Risks..................................................................................................................... 136
Policy challenges ................................................................................................... 138
Box 2.4.1 Recent investment slowdown: Middle East and North Africa ............... 142
South Asia ............................................................................................................... 147
Recent developments ............................................................................................ 147
Outlook................................................................................................................ 151
Risks..................................................................................................................... 153
Policy challenges ................................................................................................... 154
Box 2.5.1 Recent investment slowdown: South Asia ............................................ 159
Sub-Saharan Africa ................................................................................................. 165
Recent developments ............................................................................................ 165
Outlook................................................................................................................ 169
Risks..................................................................................................................... 171
Policy challenges ................................................................................................... 172
Box 2.6.1 Recent investment slowdown: Sub-Saharan Africa ............................... 173
References................................................................................................................ 180

viChapter 3

Weak Investment in Uncertain Times: Causes, Implications andPolicy Responses ..................................................................................................... 191
Introduction............................................................................................................. 193
Main features of the investment slowdown .............................................................. 196
Macroeconomic backdrop ....................................................................................... 199
Factors associated with the investment slowdown ..................................................... 200
Implications of weak investment for global trade, long-term growth and catch-up ... 208
Policies to promote investment growth .................................................................... 213
Conclusions ............................................................................................................ 227
Annex 3.1 Determinants of investment: Empirical framework ................................. 228
Annex 3.2 Definitions and Methodology ................................................................. 233
References ................................................................................................................ 235
Box 3.1 Investment-less credit booms....................................................................... 203
Box 3.2 Implications of rising uncertainty for investment in EMDEs ...................... 209
Box 3.3 Investment slowdown in China .................................................................. 214
Box 3.4 Interactions between public and private investment .................................... 221

Statistical Appendix......................................................................................................................... ..245
Figures

1.1

Summary - Global prospects................................................................ 5

1.2

Summary - Global risks and policy challenges. .................................... 6

1.3

Advanced-economy growth and inflation ........................................... 7

1.4

United States ....................................................................................... 8

1.5

Euro Area ............................................................................................ 9

1.6

Japan ................................................................................................. 10

1.7

China ................................................................................................ 11

1.8

Global trade ...................................................................................... 12

1.9

Global financial conditions ............................................................... 14

1.10

Financial conditions in EMDEs ........................................................ 15

1.11

Commodity markets ......................................................................... 16

1.12

EMDE developments ........................................................................ 17

1.1.1

Growth and poverty indicators in low-income countries.................... 20

1.1.2

Macroeconomic and financial developments in low-income
countries ........................................................................................... 22

vii

viii

1.1.3

Vulnerabilities and policy uncertainty in low-income countries ...........23

1.13

EMDE prospects.................................................................................25

1.2.1

Regional growth ..................................................................................27

1.14

Risks to global growth .........................................................................29

1.15

Risks - Policy uncertainty and protectionism ......................................30

1.16

Risks - EMDE vulnerabilities .............................................................32

1.17

Risks - Volatility around U.S. tightening cycle ....................................33

1.18

Risks - Low global interest rates and financial instability .....................34

1.19

Risks - Weakening potential growth ...................................................35

1.20

Upside risk - fiscal stimulus in major economies andgrowth spillovers .................................................................................37

1.21

Advanced-economy monetary policies .................................................38

1.22

Advanced-economy fiscal policies ........................................................39

1.23

Advanced-economy structural policies .................................................39

1.24

China financial and structural policies ................................................40

1.25

EMDE monetary and financial policies ..............................................41

1.26

EMDE fiscal policies ...........................................................................42

1.27

Services trade in EMDEs ....................................................................43

1.28

Foreign direct investment in EMDEs ..................................................44

1.29

Investment in human and physical capital ...........................................45

1.30

Impact of growth and inequality on poverty reduction .......................46

SF.1

United States in the global economy ..................................................59

SF.2

United States in global financial markets ............................................60

SF.3

Linkages between the United States and EMDE regions .....................61

SF.4

U.S. trade flows: Composition and partners .......................................62

SF.5

U.S. financial flows: Composition and partners ..................................63

SF.6

The U.S. economy and commodity markets ......................................64

SF.7

Synchronization of business and financial cycles .................................65

SF.8

Spillovers from U.S. growth shocks .....................................................66

SF.9

Spillovers from U.S. interest rate shocks to EMDEs ...........................67

SF.10

Spillovers from U.S. uncertainty shocks to EMDEs ...........................68

SF.11

Importance of the global economy for the U.S. economy ....................69

2.1.1

Growth ...............................................................................................84

2.1.2

China: Activity, exchange rates, and external accounts.........................85

2.1.3

EAP region: Selected indicators........................................................... 86

2.1.4

EAP region: Selected indicators (continued) ....................................... 87

2.1.5

Vulnerabilities..................................................................................... 88

2.1.6

Risk of uncertainty in major advanced economies ............................... 89

2.1.7

Spillovers from the United States and the Euro Area ........................... 90

2.1.8

Policy challenges ................................................................................. 91

2.1.1.1

Investment growth .............................................................................. 94

2.1.1.2

Investment growth slowdown and investment needs ........................... 95

2.1.1.3

Infrastructure indicators ...................................................................... 96

2.1.1.4

Health and education ........................................................................ 97

2.2.1

Growth ............................................................................................. 100

2.2.2

Country developments ...................................................................... 101

2.2.3

Policy responses to lower oil prices and growth ................................. 102

2.2.4

Risks of heightened policy uncertainty in major advanced
economies ........................................................................................ 103

2.2.5

Vulnerabilities................................................................................... 104

2.2.6

Policy challenges ............................................................................... 105

2.2.1.1

Investment growth slowdown in Europe and Central Asia,
2010-15............................................................................................ 109

2.2.1.2

Investment decomposition, 2010-15 ................................................. 110

2.2.1.3

Investment gaps and projects ............................................................ 111

2.2.1.4

Infrastructure indicator ..................................................................... 112

2.2.1.5

Human development indicators ........................................................ 113

2.2.1.6

Institutional quality .......................................................................... 114

2.3.1

Growth ............................................................................................ 116

2.3.2

Financial sector ................................................................................. 117

2.3.3

Banking systems................................................................................ 118

2.3.4

Inflation and monetary policy ........................................................... 118

2.3.5

Fiscal policy ...................................................................................... 119

2.3.6

External sector .................................................................................. 120

2.3.7

Unemployment and earnings ............................................................ 120

2.3.8

Regional outlook .............................................................................. 121

2.3.9

Risks of uncertainty in major advanced economies ........................... 122

2.3.10Spillovers from the United States and the Euro Area ........................ 123ix

x

2.3.1.1

Investment growth slowdown .......................................................... 127

2.3.1.2

Correlates of investment growth slowdown ...................................... 128

2.3.1.3

Investment needs ............................................................................. 129

2.4.1

Growth ............................................................................................ 132

2.4.2

External and fiscal positions ............................................................. 133

2.4.3

Egypt: Balance of payment pressures ................................................ 133

2.4.4

Inflation ........................................................................................... 134

2.4.5

Financial conditions in GCC............................................................ 134

2.4.6

Growth outlook ............................................................................... 135

2.4.7

Fiscal adjustment .............................................................................. 136

2.4.8

Major risks to the outlook ................................................................ 136

2.4.9

Risks of uncertainty in major advanced economies ........................... 137

2.4.10Spillovers from the United States and the Euro Area ....................... 138

2.4.11

Policy challenges............................................................................... 139

2.4.1.1

Investment growth slowdown ........................................................... 143

2.4.1.2

Infrastructure, health, and education indicators ................................ 144

2.5.1

Economic activity in South Asia ....................................................... 148

2.5.2

Economic activity in India................................................................ 149

2.5.3

External sector developments............................................................ 150

2.5.4

Exchange rate and inflation developments ........................................ 151

2.5.5

Fiscal developments .......................................................................... 151

2.5.6

Vulnerabilities .................................................................................. 153

2.5.7

Risks of uncertainty in major advanced economies ........................... 154

2.5.8

Spillovers from the United Sates and the Euro Area.......................... 155

2.5.9

Policy challenges............................................................................... 156

2.5.1.1

Investment growth slowdown in South Asia ..................................... 160

2.5.1.2

Investment needs in South Asia ........................................................ 162

2.6.1

Growth ............................................................................................ 166

2.6.2

External developments...................................................................... 167

2.6.3

Inflation and exchange rates ............................................................. 168

2.6.4

Fiscal developments .......................................................................... 169

2.6.5

Outlook for economic growth .......................................................... 170

2.6.6

Risks of uncertainty in major advanced economies ........................... 171

2.6.1.1

Investment growth slowdown .......................................................... 176

2.6.1.2

Investment needs ............................................................................. 178

3.1

Investment growth slowdown .......................................................... 194

3.2

Investment growth slowdown: Group-specific and regional
dimensions ..................................................................................... 196

3.3

Investment growth after global downturns ...................................... 197

3.4

Economies with investment growing below its long-term average .... 197

3.5

Investment growth forecasts ............................................................ 198

3.6

Global financial conditions and activity .......................................... 198

3.7

Terms of trade and investment growth ............................................ 199

3.8

FDI flows and investment growth ................................................... 200

3.9

Political stability and investment growth ......................................... 201

3.10

Private debt and investment growth ................................................ 201

3.11

Correlates of investment growth ...................................................... 202

3.1.1

Investment growth during credit booms and deleveraging
episodes .......................................................................................... 204

3.1.2

Coincidence between investment surges and credit booms .............. 205

3.1.3

Output growth during credit booms and deleveraging episodes ....... 206

3.12

Spillovers from the United States and the Euro Area ....................... 208

3.2.1

Evolution of uncertainty in EMDEs ............................................... 209

3.2.2

Financial market uncertainty and investment in EMDEs ................ 210

3.2.3

Policy uncertainty and investment in EMDEs .................................. 211

3.13

Slowdown in investment and global trade ....................................... 212

3.14

Labor productivity, TFP and investment ......................................... 213

3.3.1

Investment growth in China ........................................................... 216

3.3.2

Spillovers from China ..................................................................... 217

3.15

Public and private investment ......................................................... 219

3.16

Public investment and growth ......................................................... 220

3.17

Fiscal and monetary policy space ..................................................... 220

3.4.1

Public and private investment growth ............................................. 222

3.4.2

Comparison of public and private investment growth withlong-term average ........................................................................... 223

3.18

Infrastructure, education, and health investment needs ................... 225

3.19

Investment and governance reform ................................................. 227

xiTablesxii

1.1

Real GDP.............................................................................................. 4

1.1.1

Low income country forecasts ............................................................. 24

Annex 1

List of emerging market and developing economies ............................ 47

2.1.1

East Asia and Pacific forecast summary ................................................ 90

2.1.2

East Asia and Pacific country forecasts ................................................. 90

2.2.1

Europe and Central Asia forecast summary........................................ 106

2.2.2

Europe and Central Asia country forecasts ......................................... 107

2.3.1

Latin America and the Caribbean forecast summary .......................... 124

2.3.2

Latin America and the Caribbean country forecasts ........................... 125

2.4.1

Middle East and North Africa forecast summary ............................... 140

2.4.2

Middle East and North Africa economy forecasts .............................. 141

2.5.1

South Asia forecast summary ............................................................. 157

2.5.2

South Asia country forecasts .............................................................. 158

2.6.1

Sub-Saharan Africa forecast summary ................................................ 173

2.6.2

Sub-Saharan Africa country forecasts ................................................. 174

Annex 3.1.1

Correlates of investment growth ........................................................ 231

Annex 3.1.2

Robustness: Bayesian Model Averaging ............................................. 231

Annex 3.2.1

Investment growth around governance reform spurts and setbacks .... 234

Acknowledgments
This World Bank Group Flagship Report is a product of the Prospects Group in the Development
Economics Vice Presidency. The project was managed by M. Ayhan Kose and Franziska
Ohnsorge, under the general guidance of Paul Romer.
Chapters 1 and 2 were led by Carlos Arteta.
Chapter 1 (Global Outlook) was prepared by
Carlos Arteta and Marc Stocker with
contributions from Csilla Lakatos, Ekaterine
Vashakmadze, and Dana Vorisek. Additional
inputs were provided by John Baffes, Sinem Kilic
Celik, Jongrim Ha, Raju Huidrom, Gerard
Kambou, Eung Ju Kim, Hideaki Matsuoka, andModeste Some. Research assistance was provided
by Xinghao Gong, Liwei Liu, Trang Thi Thuy
Nguyen, and Peter Davis Williams.
The Special Focus (The U.S. Economy and theWorld) was prepared by M. Ayhan Kose, Csilla
Lakatos, Franziska Ohnsorge, and Marc Stocker
with contributions from Carlos Arteta, John
Baffes, Jongrim Ha, Raju Huidrom, Ergys Islamaj,
Ezgi O. Ozturk, Hideaki Matsuoka, Naotaka
Sugawara, and Temel Taskin. Research assistance
was provided by Xinghao Gong, Trang Nguyen,
and Peter Davis Williams.
Box 1.1 was prepared by Gerard Kambou andBoaz Nandwa. Box 1.2 was prepared by Derek
Chen, Gerard Kambou, Boaz Nandwa, Yoki
Okawa, Ekaterine Vashakmadze, and Dana
Vorisek.
Chapter 2 (Regional Outlooks) was prepared byseveral authors. The authors were Ekaterine
Vashakmadze (East Asia and Pacific), Yoki Okawa
and Ekaterine Vashakmadze (Europe and CentralAsia), Derek Chen and Dana Vorisek (Latin
America and the Caribbean), Dana Vorisek(Middle East and North Africa), Boaz Nandwa(South Asia), and Gerard Kambou (Sub-SaharanAfrica). Research assistance was provided by
Xinghao Gong, Liwei Liu, Trang Nguyen, Shituo
Sun, and Peter Davis Williams.

Chapter 3 (Weak Investment in Uncertain Times:
Causes, Implications, and Policy Responses) was
prepared by M. Ayhan Kose, Franziska Ohnsorge,
Lei Sandy Ye, and Ergys Islamaj, with
contributions from Jongrim Ha, Raju Huidrom,
Csilla Lakatos, Hideaki Matsuoka, Yoki Okawa,Naotaka Sugawara, Congyan Tan, Ekaterine
Vashakmadze and Shu Yu. Research assistance wasprovided by Mai Anh Bui, Collette Wheeler,
Yiruo Li, Liwei Liu, and Cristhian Vera Avellan.
Box 3.1 (Investment-less credit booms) was
prepared by Shu Yu; Box 3.2 (Implications of
Rising Uncertainty for Investment in EMDEs)
was prepared by Jongrim Ha, Raju Huidrom, andCongyan Tan; Box 3.3 (Investment Slowdown in
China) was prepared by Ekaterine Vashakmadze,
Hideaki Matsuoka, and Trang Nguyen; Box 3.4(Interactions between Public and Private
Investment) was prepared by Yoki Okawa.
Modeling and data work were provided by
Hideaki Matsuoka, assisted by Mai Anh Bui,
Xinghao Gong, Cristhian Javier Vera Avellan,
Jungjin Lee, Liwei Liu, Trang Nguyen, Shituo
Sun, Collette Mari Wheeler, and Peter Davis
Williams.
The online publication was produced by a teamincluding Graeme Littler, Praveen Penmetsa,
Mikael Reventar, and Katherine Rollins, withtechnical support from Marjorie Patricia
Bennington. Phillip Hay and Mark Felsenthal
managed media relations and the dissemination.
The print publication was produced by Maria Hazel
Macadangdang, Adriana Maximiliano, and Ianara
Costa Pedrosa Mota Pinto.
Many reviewers offered extensive advice and comments. These included: Kishan Abeygunawardana,xiii

Magda Adriani, Abebe Adugna Dadi, Sara
Alnashar, Paloma Anos Casero, Kiatipong
Ariyapruchya, Konstantin Atanesyan, Sarah
Nankya Babirye, Marina Bakanova, Luca
Bandiera, Mary A. Barton-Dock, Davaadalai
Batsuuri, Hans Anand Beck, Olivier Beguy,
Robert Carl Michael Beyer, Guillermo Raul
Beylis, Enrique Blanco Armas, Monika
Blaszkiewicz-Schwartzman, Elena Bondarenko,
Eduardo Borensztein, Andrew Burns, Maurizio
Bussolo, César Calderón, Kevin Carey, Jasmin
Chakeri, Shubham Chaudhuri, Jean-Pierre
Chauffour, Laura Chioda, Ajai Chopra, Ibrahim
Saeed Chowdhury, Karl Kendrick Tiu Chua,
Kevin Chua, Punam Chuhan-Pole, Kevin
Clinton, Maria Andreina Clower, Andrea
Coppola, Tito Cordella, Gerardo M. Corrochano,
Damir Cosic, Kevin Thomas Garcia Cruz, Barbara
Cunha, Stefano Curto, Somneuk Davading,Nancy Sabina Davies-Cole, Annette De Kleine
Feige, Ruth Delgado Flynn, Agim Demukaj, Allen
Dennis, Shantayanan Devarajan, Viet Tuan Dinh,
Ndiami Diop, Calvin Zebaze Djiofack, Doerte
Doemeland, Mariam Dolidze, Ralph Van Doorn,
Jozef Draaisma, Bakyt Dubashov, SebastianEckardt, Kim Alan Edwards, Christian EigenZucchi, Khalid El Massnaoui, Olga Emelyanova,
Jorge Familiar Calderon, Marianne Fay, Maria
Marta Ferreyra, Manuela V. Ferro, Erik Feyen,
Norbert Matthias Fiess, Fitria Fitrani, Cornelius
Fleischhacker, Samuel Freije-Rodriguez, Mismake
D. Galatis, Laura Sofia Olivera Garrido, Adnan
Ashraf Ghumman, Frederico Gil Sander,
Fernando Giuliano, Anastasia Golovach, Alvaro
Gonzalez, Maria De los Angeles Cuqui Gonzalez
Miranda, David Michael Gould, Poonam Gupta,
Gohar Gyulumyan, Sabine Hader, Kiryl Haiduk,
Lea Hakim, Keith Hansen, Birgit Hansl, Marek
Hanusch, Wissam Harake, Caroline Heider, Jesko
S. Hentschel, Marco Hernandez, Santiago
Herrera, Sandra Hlivnjak, Bert Hofman, Sahar
Hussain, Zahid Hussain, Stella Ilieva, Fernando
Gabriel Im, Yoichiro Ishihara, Ivailo V. Izvorski,
Evans Jadotte, Carlos Felipe Jaramillo,
Mohammad Omar Joya, Kamer KarakurumOzdemir, Leszek Pawel Kasek, Vera Kehayova,

xiv

Tehmina Khan, Zarau Wendeline Kibwe, Mizuho
Kida, Edith Kikoni, Markus Kitzmüller, David
Knight, Friederike Norma Koehler, Naoko C.
Kojo, Auguste Tano Kouame, Chandana
Kularatne, Diana Mercedes Lachy Castillo, JeanPierre Lacombe, Jacqueline Larrabure Rivero,
Thomas Blatt Laursen, Eric Le Borgne, Daniel
Lederman, Taehyun Lee, Joseph Louie C. Limkin,John Litwack, Sodeth Ly, Julio Ricardo Loayza,
Julie Saty Lohi, Rohan Longmore, J. Humberto
Lopez, David Cal MacWilliam, Sanja MadzarevicSujster, Sandeep Mahajan, William Maloney,
Miguel Eduardo Sanchez Martin, Ashwaq Natiq
Maseeh, Oliver Masetti, Gianluca Mele, Rhodora
Mendoza Paynor, Dino Merotto, Elitza
Alexandrova Mileva, Deepak K. Mishra, Saiyed
Shabih Ali Mohib, Lars Moller, Lalita M. Moorty,
Rafael Munoz Moreno, Lili Mottaghi, Nataliya
Mylenko, Evgenij Najdov, Antonio Nucifora,
Harun Onder, Felix Oppong, Carlos Rafael Orton
Romero, Lucy Pan, Ugo Panizza, John Panzer,
Catalin Pauna, Keomanivone Phimmahasay,
Samuel Jaime Pienknagura, Miria A. Pigato, Rong
Qian, Habib Nasser Rab, Martin Raiser, Martin
Rama, Nadir Ramazanov, Julio Revilla, David
Robinson, Alberto Rodriguez, David Rosenblatt,Michele Ruta, Pablo Saavedra, Yaye Seynabou
Sakho, Apurva Sanghi, Ilyas Sarsenov, Cristina
Savescu, Marc Tobias Schiffbauer, Philip Schuler,
Claudia Paz Sepulveda, Lazar Sestovic, Sudhir
Shetty, Altantsetseg Shiilegmaa, Joana C.G. Silva,
Rosalie Singson Dinglasan, Gregory Smith, Karlis
Smits, Nikola Spatafora, Abdoulaye Sy, Congyan
Tan, Fulbert Tchana Tchana, Shakira Binti Teh
Sharifuddin, Mark Thomas, Hans Timmer,
Augusto de la Torre, Eskender Trushin, Christoph
Theodor Friedrich Ungerer, Ekaterina Ushakova,
Robert Johann Utz, Julio Velasco, Mathew
Verghis,Gallina
Andronova
Vincelette,
Muhammad Waheed, Jan Walliser, Hernan
Winkler, Kei-Mu Yi, Ayberk Yilmaz, Hoda
Youssef, Albert Zeufack, Luan Zhao, May Thet
Zin, and Bakhrom Ziyaev. Regional Projections
and write-ups were produced in coordination withcountry teams, country directors, and the offices of
the regional chief economists.

Abbrevia ons
AE

Advanced economies

ASEAN

Association of Southeast Asian Nations

bbl

barrelBRICS

Brazil, Russian Federation, India, China, and South Africa

CAREC

Central Asia Regional Economic Cooperation

CDS

credit default swap

CY

calendar year

EAP

East Asia and Pacific

EBRD

European Bank for Reconstruction and Development

ECA

Europe and Central Asia

ECB

European Central Bank

EIB

European Investment BankEMBI

Emerging Markets Bond Index

EMDE

emerging markets and developing economies

EU

European Union

FDI

foreign direct investment

FOMC

Federal Reserve Open Market Committee

FY

fiscal year

GCC

Gulf Cooperation Council

GDPgross domestic product

GEP

Global Economic Prospects

GST

goods and services tax

IMFInternational Monetary Fund

LAC

Latin America and Caribbean

LIC

low-income country

MNA

Middle East and North Africa

MXEM

MSCI Emerging Markets Index

NPLs

nonperforming loans

OECD

Organisation for Economic Co-operation and Development

OPEC

Organization of the Petroleum Exporting Countries

PMI

purchasing managers’ indexes

PPP

purchasing power parity

PVAR

panel vector autoregression

RHS

right-hand side (in figures)

SAR

South Asia Region

SOEstate-owned enterprise

SSA

Sub-Saharan Africa

xv

xvi

STRI

services trade restrictiveness index

TFP

total factor productivity

VAR

vector autoregression

WEO

World Economic Outlook

WITS

World Integrated Trade Solution

WTI

West Texas Intermediate

WTO

World Trade Organization

Execu ve Summary
Stagnant global trade, subdued investment, and heightened policy uncertainty marked another difficult year for
the world economy. A moderate recovery is expected for 2017, with receding obstacles to activity in commodity
exporters and solid domestic demand in commodity importers. Weak investment is weighing on medium-term
prospects across many emerging markets and developing economies (EMDEs). Although fiscal stimulus in major
economies, if implemented, may boost global growth above expectations, risks to growth forecasts remain tilted
to the downside. Important downside risks stem from heightened policy uncertainty in major economies.
Global Outlook: Subdued Growth, Shifting
Policies, Heightened Uncertainty. Stagnant
global trade, subdued investment, and heightened
policy uncertainty marked another difficult year
for the world economy. Global growth in 2016 isestimated at a post-crisis low of 2.3 percent and is
projected to rise to 2.7 percent in 2017. Growthin emerging market and developing economies(EMDEs) is expected to pick up in 2017,reflecting receding obstacles to activity incommodity exporters and continued solid
domestic demand in commodity importers. Weakinvestment and productivity growth are, however,weighing on medium-term prospects across many
EMDEs. Downside risks to global growth include
increasing policy uncertainty in major advanced
economies and some EMDEs; financial market
disruptions; and weakening potential growth.
However, fiscal stimulus and other growthenhancing policies in key major economies—inparticular, the United States—could lead tostronger-than-expected activity and thus represent
a substantial upside risk to the outlook. In view oflimited room for macroeconomic policy to absorb
further adverse shocks, as well as subdued growthprospects, structural reforms that boost potential
growth remain a priority. In EMDEs, investment
in human and physical capital would help narrow
unmet needs in skills and infrastructure andsupport growth for the long term. Rebuilding

policy space, addressing vulnerabilities, andenhancing international integration by promoting
trade and foreign direct investment would also
boost resilience and improve growth prospects.
Regional Perspectives. EMDE regions with
substantial numbers of commodity-importing
economies—East Asia and the Pacific and South
Asia—are projected to experience solid growth. In
contrast, the outlook for EMDE regions withlarge numbers of commodity exporters is mixed.
Growth in Latin America and the Caribbean andin Europe and Central Asia is expected toaccelerate in 2017, mainly reflecting a bottoming
out of activity in Brazil and Russia. Growth in the
Middle East and North Africa will pick up
modestly, as oil prices recover. While growth
should also rebound in Sub-Saharan Africa, theimprovement is notably weaker than previously
expected, as some commodity exporters struggle
to adjust to low commodity prices.
Thematic pieces: Role of the U.S. Economy in
the World; Weak Investment in EMDEs. This
edition of Global Economic Prospects includes a
special focus on the role of the U.S. economy in
the world and a chapter on the causes,
consequences and policy implications of recent
investment weakness in EMDEs.
The U.S. Economy and the World.
Developments in the U.S. economy, the world’s

xviilargest, have effects far beyond its shores. A surge
in U.S. growth—whether due to expansionary
fiscal policies or other reasons—could provide asignificant boost to the global economy.
Tightening U.S. financial conditions—whether
due to faster-than-expected normalization of U.S.
monetary policy or other reasons—could
reverberate across global financial markets, withadverse effects on some EMDEs that rely heavily
on external financing. In addition, lingering
uncertainty about the course of U.S. economic
policy could have a significantly negative effect on
global growth prospects. While the United States
plays a critical role in the world economy, activity
in the rest of the world is also important for theUnited States. The new U.S. administration’s
specific economic policies are still being shaped.
By assessing the U.S. economy’s role in the world,
the objective of this Special Focus is to inform theanalysis of potential global implications of suchpolicies.
Weak Investment in Uncertain Times: Causes,
Implications and Policy Responses. Investment
growth in EMDEs has slowed sharply since 2010.
This deceleration has been most pronounced in
the largest emerging markets and commodityexporting EMDEs, but has now spread to thexviii

majority of these economies: investment growth isbelow its long-term average in the most EMDEs
over the past quarter century except during serious
global downturns. These economies account for
more than one-third of global GDP and about
three-quarters of the world’s population and theworld’s poor. While slowing investment growth ispartly a correction from high pre-crisis growth
rates in some EMDEs, it also reflects a range of
obstacles holding back investment: terms-of-trade
shocks (for oil exporters), slowing foreign direct
investment inflows (for commodity importers), as
well as private debt burdens and political risk (forall EMDEs). Weak investment is a significant
challenge for EMDEs in light of their sizable
investment needs to make room for expanding
economic activity, to accommodate rapid
urbanization, and to achieve sustainable
development goals. Sluggish investment also setsback future growth prospects by slowing theaccumulation of capital and productivity growth.
Although policy priorities depend on country
circumstances, including the availability of policy
space and economic slack, policymakers should beready to employ the full range of cyclical andstructural policies to accelerate investment
growth.

CHAPTER 1

global outlook
Subdued Growth, Shifting Policies,
Heightened Uncertainty

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

Stagnant global trade, subdued investment, and heightened policy uncertainty marked another difficult year for
the world economy. Global growth in 2016 is estimated at a post-crisis low of 2.3 percent and is projected torise to 2.7 percent in 2017. Growth in emerging market and developing economies (EMDEs) is expected to pickup in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic
demand in commodity importers. Weak investment and productivity growth are, however, weighing on
medium-term prospects across many EMDEs. Downside risks to global growth include increasing policy
uncertainty in major advanced economies and some EMDEs, financial market disruptions, and weakening
potential growth. However, fiscal stimulus in key major economies—in particular, the United States—could
lead to stronger-than-expected activity in the near term and thus represent a substantial upside risk to theoutlook. In view of the limited room for macroeconomic policy to absorb further adverse shocks, as well as
subdued growth prospects, structural reforms that boost potential growth remain a priority. In EMDEs,
investment in human and physical capital would help narrow unmet needs in skills and infrastructure andsupport growth for the long term. Rebuilding policy space, addressing vulnerabilities, and enhancing
international integration by promoting services trade and foreign direct investment would also boost resilienceand improve growth prospects.

Summary
Stalling global trade, weak investment, andheightened policy uncertainty have depressedworld economic activity. Global growth isestimated to have fallen to 2.3 percent in 2016—
the weakest performance since the global financial
crisis and 0.1 percentage point below June 2016
Global Economic Prospects forecasts (Figure 1.1).
Global growth is expected to rise to 2.7 percent in2017, mainly reflecting a recovery in emerging
market and developing economies (EMDEs).
Advanced economies continue to struggle with
subdued growth and low inflation in a context ofincreased uncertainty about policy direction, tepid
investment, and sluggish productivity growth.
Activity decelerated in the United States and, to alesser degree, in some other major economies. As aresult, advanced-economy growth is now
estimated to have slowed to 1.6 percent in 2016, a
downward revision of 0.1 percentage point.
Advanced-economy growth is expected to recoversomewhat, to an average pace of 1.8 percent
throughout the forecast period. In the UnitedStates, manufacturing activity is expected toNote: This chapter was prepared by Carlos Arteta and Marc
Stocker, with contributions from Csilla Lakatos, Ekaterine
Vashakmadze, and Dana Vorisek. Additional inputs were provided byJohn Baffes, Sinem Kilic Celik, Jongrim Ha, Raju Huidrom, Gerard
Kambou, Eung Ju Kim, Hideaki Matsuoka, and Modeste Some.
Research assistance was provided by Xinghao Gong, Liwei Liu, Trang
Thi Thuy Nguyen, and Peter Davis Williams.

rebound, contributing to a modest pickup in
growth from 1.6 percent in 2016 to an average of
2.2 percent in 2017-18. This forecast does notincorporate the effects of policy proposals by the
new U.S. administration, as their scope andultimate form are still uncertain. Fiscal stimulus, if
implemented, could result in stronger growth
outcomes than currently predicted. In the EuroArea and Japan, supportive monetary policies will
help stimulate activity throughout the forecast
period. Inflation is expected to rise gradually, but
it will remain below central banks’ target in theEuro Area and Japan throughout the forecasthorizon.
Anemic growth in advanced economies was
accompanied by a further weakening of global
trade in 2016. Mitigating these headwinds,
commodity prices have stabilized and areprojected to increase moderately during 2017-19,
providing support for commodity-exporting
EMDEs. The rise in U.S. yields since earlyNovember has led to a notable tightening offinancing conditions for EMDEs, in some cases
resulting in significant currency depreciation andportfolio outflows. Despite this tightening,financing conditions still remain generally benign,
as major central banks maintain accommodative
monetary policies.
EMDEs grew at an estimated 3.4 percent in 2016,broadly in line with previous expectations.
Commodity exporters as a group continued to
expand at markedly lower rates than commodity

3

4

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 1.1 Real GDP1
(percent change from previous year)
2014

2015

2016

2017

Estimates

World

2018

2019

2015

2016

2017

2018

Percentage point differences from
June 2016 projections

Projections

2.7

2.7

2.3

2.7

2.9

2.9

0.3

-0.1

-0.1

-0.1

Advanced economies

1.9

2.1

1.6

1.8

1.8

1.7

0.3

-0.1

-0.1

-0.1

United States
Euro Area
Japan
Emerging and developing economies(EMDEs)Commodity exporting EMDEs
Other EMDEs

2.4
1.2
0.3

2.6
2.0
1.2

1.6
1.6
1.0

2.2*
1.5
0.9

2.1*
1.4
0.8

1.9*
1.4
0.4

0.2
0.4
0.6

-0.3
0.0
0.5

0.0*
-0.1
0.4

0.0*
-0.1
0.1

4.3

3.5

3.4

4.2

4.6

4.7

0.1

-0.1

-0.1

0.0

2.1
6.0

0.4
6.0

0.3
5.6

2.3
5.6

3.0
5.7

3.1
5.8

0.2
0.1

-0.1
-0.2

0.0
-0.2

0.0
-0.1

Other EMDEs excluding China

4.5

5.0

4.3

4.6

5.0

5.1

0.3

-0.4

-0.3

-0.1

6.7
7.3
5.0
0.8
2.3
0.7
5.2
3.3

6.5
6.9
4.8
2.8
0.5
-3.7
6.1
3.9

6.3
6.7
5.1
3.1
1.2
-0.6
2.5
2.5

6.2
6.5
5.3
3.2
2.4
1.5
3.0
3.1

6.1
6.3
5.5
3.3
2.8
1.7
3.5
3.3

6.1
6.3
5.5
3.4
2.9
1.8
3.7
3.4

0.0
0.0
0.0
0.0
0.6
0.0
2.1
0.3

0.0
0.0
0.0
0.6
0.0
0.6
-1.0
-1.2

0.0
0.0
0.0
0.5
-0.1
0.1
-0.5
-0.4

0.0
0.0
0.0
0.3
0.0
-0.1
-0.1
-0.2

0.9
0.5
2.3
-2.6
3.3
3.6
4.3
2.9
6.7
7.2
4.0
6.1
4.7
1.6
6.3
5.4

-0.6
-3.8
2.6
2.5
3.2
3.5
1.7
4.4
6.8
7.6
4.0
6.6
3.1
1.3
2.7
3.0

-1.4
-3.4
2.0
-2.3
2.7
1.0
4.6
4.3
6.8
7.0
4.7
7.1
1.5
0.4
-1.7
0.4

1.2
0.5
1.8
2.7
3.1
1.6
5.2
4.0
7.1
7.6
5.2
6.8
2.9
1.1
1.0
1.2

2.3
1.8
2.5
3.2
3.3
2.5
4.8
4.7
7.3
7.8
5.5
6.5
3.6
1.8
2.5
0.9

2.6
2.2
2.8
3.2
3.4
2.6
4.5
5.4
7.4
7.8
5.8
6.7
3.7
1.8
2.5
0.9

0.1
0.0
0.1
0.4
0.4
0.1
0.1
0.2
-0.2
0.0
0.0
0.5
0.1
0.0
0.0
0.2

-0.1
0.6
-0.5
-1.8
-0.1
-0.9
0.2
1.0
-0.3
-0.6
0.5
0.6
-1.0
-0.2
-2.5
-0.5

0.0
0.7
-1.0
-0.4
0.0
-0.4
0.3
-0.2
-0.1
-0.1
0.7
0.5
-1.0
0.0
-2.5
-1.9

0.2
1.0
-0.5
0.2
-0.1
0.2
0.1
0.1
0.0
0.1
0.7
-0.3
-0.7
-0.2
-1.5
-2.5

1.9
4.4
6.2
5.1
3.5
3.7

2.2
3.6
4.8
3.8
3.3
2.8

1.6
3.5
4.7
4.3
3.0
2.5

1.8
4.4
5.6
5.1
3.5
3.6

1.8
4.8
6.0
5.4
3.7
4.0

1.7
4.9
6.1
5.5
3.7
3.9

0.3
0.1
0.0
0.0
0.2
0.0

-0.1
-0.1
-0.6
0.1
-0.1
-0.5

-0.1
-0.1
-0.7
0.0
-0.1
-0.3

-0.1
0.0
-0.6
0.1
0.0
-0.2

-7.5

-47.3

-15.1

28.2

8.4

4.6

0.0

4.1

6.3

1.9

-4.6

-15.0

-2.6

1.4

2.2

2.1

0.0

2.5

-0.9

-0.1

East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
RussiaTurkeyPolandLatin America and the Caribbean
BrazilMexicoArgentina
Middle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep.2
South Asia
India3
Pakistan2
Bangladesh2
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items:
Real GDP1
High-income countries
Developing countries
Low-income countries
BRICS
World (2010 PPP weights)
World trade volume4
Commodity prices
Oil price5
Non-energy commodity price index

Source: World Bank.
Notes: PPP = purchasing power parity. World Bank forecasts are frequently updated based on new information. Consequently, projections presented here may differ from those containedin other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Country classifications and lists of Emerging Market and Developing
Economies (EMDEs) are presented in Annex Table 1. BRICS include: Brazil, Russia, India, China, and South Africa.
1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
2. GDP growth values are on a fiscal year basis. Aggregates that include these countries are calculated using data compiled on a calendar year basis. Pakistan's growth rates are based on
GDP at factor cost. The column labeled 2017 refers to FY2016/17.
3. The column labeled 2016 refers to FY2016/17.
4. World trade volume for goods and non-factor services.
5. Simple average of Dubai, Brent, and West Texas Intermediate.
For additional information, please see www.worldbank.org/gep.
* The U.S. forecasts do not incorporate the effect of policy proposals by the new U.S. administration, as their overall scope and ultimate form are still uncertain. However, simulations indicatethat the large reductions in corporate and personal income taxes suggested by the new administration could—if fully implemented and without consideration of any other policychanges—increase both U.S. GDP growth and global growth above baseline projections in 2017 and 2018. See the “Risks to the outlook” section of Chapter 1 for further details.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

There is substantial uncertainty around baseline
projections (Figure 1.2). For example, while the

A. Global growth

B. Contribution to global growthrevisions

Percent

Percentage points

World Advanced economies EMDEs

5

0.00

4

-0.02

3

-0.04

2

-0.06

1

-0.08
-0.10

2019

2018

2017

2016

2015

2014

2013

2012

0

-0.12
2016

2017

2018

Percent, year-on-year
20
15
10
5
0
-5
-10
-15
-20

Percent
50

1992-2008 average

30
10
-10
-30

2016

2014

E. Growth by country groups
Percent
10

2014-162017-19

-50

2012

2010

D. Changes in commodity prices

2008

C. Global goods trade growth-70
EnergyMetalsAgriculture

F. Contribution to global growth

1990-2008 average
2003-2008 average

Percentage points
3.5
Advanced economies
3.0

6

2.5

4

2.0

2

1.5

0

1.0

2014
2015
2016
2017
2018
2019

8

2014
2015
2016
2017
2018
2019

Within the broader group of EMDEs, growth in
low-income countries (LICs) is estimated to havedecelerated slightly to 4.7 percent in 2016. Someoil and metal exporters slowed sharply, as
they continue to struggle to adjust to low
commodity prices. In addition, a number of LICs
faced domestic headwinds, including droughts,
political tensions, and security challenges.
However, many commodity-importing LICs
continued to grow solidly. External and domestic
conditions should improve gradually, with LICs
growth rebounding to 5.6 percent in 2017 andreaching 6.1 percent by 2019.

Global growth in 2016 is estimated at a post-crisis low of 2.3 percent. A
moderate recovery is expected in 2017 amid heightened uncertainty.
Growth projections continued to be downgraded for both advanced
economies and emerging market and developing economies (EMDEs),
albeit less than in previous forecast rounds. Global goods trade wasstagnant for most of 2016, while commodity prices are projected toexperience a modest recovery over the forecast period. Among EMDEs,
growth in commodity importers is expected to remain solid, while growth incommodity exporters is projected to pick up in 2017 from near stagnationin 2016, helping EMDEs to make their strongest contribution to global
growth since 2013.

2006

EMDE growth is expected to accelerate to 4.2
percent in 2017 and to an average of 4.7 percent
in 2018-19. EMDEs are forecast to contribute 1.6
percentage points to global growth in 2017,accounting for about 60 percent of global growth
for the first time since 2013. With the anticipatedincreases in commodity prices, particularly for oil,the divergence in growth outlooks between
commodity exporters and importers is set tonarrow. The waning effect of currency
depreciations in commodity exporters, and of pastdeclines in energy prices for importers, should also
narrow differences in inflation between the twogroups. That said, the long-term EMDE outlook
is clouded by a number of factors—mostprominently, uncertainty about global tradeprospects and advanced-economy policies, aweakening in potential output resulting from
subdued investment, sluggish productivity growth,and demographic factors.

FIGURE 1.1 Summary - Global prospects

2014
2015
2016
2017
2018
2019

importers. Growth in commodity exporters for2016 is estimated at 0.3 percent. Improved
performance in some large EMDE exporters—
including a more rapid bottoming out in the
Russian Federation and an easing in the pace ofcontraction in Brazil—and an increase incommodity prices from their early-2016 lows
offset additional weakness in other exporters, mostnotably in Sub-Saharan Africa. Meanwhile,commodity importers are estimated to have grown
5.6 percent, reflecting resilient domestic demand,lowcommodity
prices,andgenerally
accommodative macroeconomic policies.

5

CHAPTER 1

EMDE
commodity
importers

EMDE
commodity
exporters

EMDEs

EMDEs

0.5
0.0
2014

2015

2016

2017

2018

2019

Sources: CPB Netherlands Bureau for Economic Policy Analysis, World Bank.
A.E.F. Shaded area indicates forecasts. Aggregate growth rates and contributions calculated using
constant 2010 U.S. dollars GDP weights.
B. Contribution to global growth revisions measured in constant 2010 U.S. dollars. Sum ofcontributions from individual country growth revisions can differ from global growth revisions reported
in Table 1.1 due to decimal rounding.
C. Global goods trade measured in volume terms. Data start in 1992. Last observation is September
2016.
D. Commodity price changes based on actual annual average prices up to 2016 and forecasts for2017 to 2019.

6

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.2 Summary - Global risks and policy
challenges
There is substantial uncertainty around global growth projections.
Downside risks to growth include rising policy uncertainty, particularly in
the United States and Europe; financial market disruptions; and growth
disappointments in major economies. In contrast, fiscal stimulus in major
economies—particularly, the United States—represent an important upsiderisk. A secular decline in equilibrium interest rates constrains monetary
policy in major advanced economies. In EMDEs, large investment gaps
amid limited fiscal resources remain important challenges.
A. Risks to global growth projections

B. Global policy uncertainty

Percent

Index, Jan. 2000 = 100
400

5
Fan
chart

5

4

4

300

3

3

250

2

2

350

200
50 percent
80 percent
1
90 percent
Baseline
0
2015
2016

1

150
100

2016

2014

2012

2010

2008

2006

2004

2000

2002

50
0
2018

2017

C. Labor productivity growth

D. Five–year ahead investment growthforecasts for EMDEs

Percent
3

Percent
8

2

6

1

4

Percent of global GDP
Current investment

-1
2000

2005

2010

2015

Education

0.0

Health0.4
Climate change

0.8

1Food security

2

Water andsanitation

1.2

0

Investment gap

1.6

Telecoms

Japan

3

-2
1995

2016

F. SDG-related investment needs

Transport

Euro Area

2014

EMDEs

E. Real equilibrium interest rates
Percent
4
United States

0

2010

2016

2010-15

2003-08

2016

Advanced
economies

2

Power

World

2010-15

2003-082016

2010-15

2003-080

2012

1990-2008 average

Sources: Conference Board; Consensus Forecasts; Economic Policy Uncertainty; Iwata,
Fueda-Samikawa, and Takahashi (2016); Holston, Laubach, and Williams (2016); United Nations
Conference on Trade and Development, World Bank.
A. The fan chart methodology is described in Ohnsorge, Stocker, and Some (2016).
B. Global policy uncertainty as measured in Davis (2016). Based on the frequency of articles indomestic newspapers mentioning economic policy uncertainty. 6-month moving average. Lastobservation is November 2016.
C. Productivity measured as real GDP (in constant USD) per hour worked.
D. Five-year ahead Consensus Forecasts. Unweighted averages of 21 EMDEs. Latest available
month in the year denoted. Last observation is October 2016.
E. Real equilibrium rates for the U.S. and Euro Area estimated by Holston, Laubach, and Williams(2016) and by Iwata, Fueda-Samikawa, and Takahashi (2016) for Japan. The real equilibrium interest
rate is the real policy rate that is consistent with full employment, stable prices, and growth atpotential. Last observation is 2016Q2.
F. “SDG” denotes Sustainable Development Goals. Investment refers to capital expenditure.
Operating expenditure is not included. Investment gaps are based on upper bound estimates by
UNCTAD (2014).

central forecast for global growth in 2017 is 2.7
percent, there is a 50-percent probability that
actual growth will be between 2 percent to 3.2
percent. The materialization of downside risks
could derail a fragile global economic recovery.
The heightened level of policy uncertainty,
especially regarding trade, has been exacerbated byrecent political developments—most notably,
electoral outcomes in the United States and theUnited Kingdom. This and other risks—particularly financial market disruptions amidtighter global financing conditions—may be
amplified over the medium term by mounting
protectionist tendencies, slower potential growth,and elevated vulnerabilities in some EMDEs.
However, fiscal stimulus in key major economies
could lead to stronger-than-expected activity inthe near term and thus represent a substantial
upside risk to the outlook—particularly, in the
United States, where the new administration has
signaled an intention to pursue expansionary fiscal
policies, including tax cuts and the facilitation of
infrastructure spending.
The sluggish economic outlook underscores theneed to implement structural policies that support
domestic demand and, especially, reinvigorate
investment. In advanced economies, extremely low
and negative real equilibrium interest rates
constrain the effectiveness of monetary policy andmay warrant more supportive fiscal policies. Moregenerally, macroeconomic policies should remain
accommodative until evidence of capacity
constraints emerge and inflation is on a clear
upward trend. In EMDEs, finding an appropriatebalance between fiscal adjustment, measures toreduce vulnerabilities, and growth-oriented
reforms aimed at raising human capital andphysical infrastructure will be challenging for somecountries. Policies that boost domestic sources oflong-term
growth—critically,
long-term
investment and productivity—are a priority.
Investing in human and physical capital will help
narrow unmet investment gaps in skills andinfrastructure. These policies could be reinforced
by efforts to further international integration, suchas those that support growth in EMDE services
trade, and that create an environment to maximize
the benefits of foreign direct investment (FDI).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Subdued productivity growth and rising demographic pressures arereflected in potential growth that remains well below long-term averages
across major advanced economies. Following weak growth in 2016, amodest recovery is expected in 2017, but policy uncertainty has increased.
Inflation expectations have recovered appreciably in the United States,reflecting prospects of significant policy changes, but remain low in theEuro Area and Japan.
A. Labor productivity growth

B. Potential output growth

Percent
3

Percent
3

1990-2008 average

22Euro Area

2016

2010-15

2003-08

Euro AreaJapan

D. Long-term inflation expectations
1990-2008 average
2003-2008 average

Percent
United States
4Euro Area

Japan

3

2

2
1

1
0

2016

2015

2014

2013

Japan

2012

2014
2015
2016
2017
2018
2019

Euro Area

2011

2014
2015
2016
2017
2018
2019

United States

-1

2010

2014
2015
2016
2017
2018
2019

0

Sources: Bank of Japan (2016), Conference Board, Congressional Budget Office (2016), European
Commission (2016), World Bank.
A. Annual growth in real GDP per hour worked, in 2015 U.S. dollars.
B. Potential growth estimates from the U.S. Congressional Budget Office (2016) for the UnitedStates, Bank of Japan (2016) for Japan, and European Commission (2016) for the Euro Area.
C. Shaded area indicates forecasts.
D. Long-term inflation expectations are derived from 5-year 5-year forward swap rates.
Last observation is December 19, 2016.

private investment (Figure 1.4). In the run-up to
the U.S. elections in November, activity had
picked up again, and a further tightening of labormarkets had led to slowly rising wage growth. This
supported continued gains in real disposable
income, which could help deliver a further
reduction in poverty rates, following a drop in2015 (Proctor, Semega, and Kollar 2016).

United States
Growth in the United States slowed markedly,
from 2.6 percent in 2015 to an estimated 1.6
percent in 2016, 0.3 percentage point below
previous projections. The U.S. economy was heldback in 2016 by soft exports, a continued
drawdown in inventories, and a deceleration in2016

2010-15

2003-082016

United StatesJapan

C. GDP growth
Percent30

2010-152016

2010-15

2003-082016

2010-15

2003-082016-1

2003-081

0

United States

Across major advanced economies, thedeceleration in growth in 2016 to 1.6 percent
reflected renewed policy uncertainties, weakexternal demand, and subdued productivity
growth (Figure 1.3). Activity is expected to regain
modest momentum in 2017-19, but uncertainty
associated with policies of the new administrationin the United States and with the United
Kingdom’s decision to leave the European Union(Brexit) could significantly influence the growthtrajectory of advanced economies. Growth
projections for 2017 and 2018 have been revised
down for the Euro Area and, especially, for theUnited Kingdom. For the United States, baseline
forecasts for 2017 and 2018 are unchanged from
June projections, in the absence of specific details
about policy changes to be implemented by the
new administration. Whereas constraints tomonetary policy have intensified, fiscal policy islikely to play a greater role in the coming years.
Weak productivity growth and rising demographicpressures, which weigh on labor supply and could
contribute to a lower rate of return on capital,
continue to constrain long-term prospects.

1992-2008 average

12010-15

Advanced economies continue to be afflicted by weakgrowth and low inflation, amid rising uncertainty
about future policy direction. After slowing to 1.6
percent in 2016, growth is projected to recoversomewhat in 2017-19, although the range of possible
outcomes has significantly widened after the electionsin the United States and the United Kingdom’s
decision to leave the European Union. In China,
projections are unchanged, despite resurfacing
concerns about buoyant property markets, as growthslows gradually toward more sustainable levels, witha rebalancing from manufacturing to services.

FIGURE 1.3 Advanced-economy growth and inflation

2003-08

Major economies: Recent
developments and outlook

7

CHAPTER 1

The outcome of the U.S. elections has mademacroeconomic projections more uncertain.
Proposals for corporate and personal income tax
cuts; infrastructure spending; and shifts in trade,
immigration, and regulation policies are likely tohave sizable effects on the U.S. outlook—as well as
spillovers on the rest of the world (Special Focus).

8

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.4 United States
Growth slowed in 2016, held back by weak exports and investment.
However, the U.S. labor market remained resilient and wage growth
accelerated. Policy uncertainty has increased substantially following theelections; if it persists, it could have potential knock-on effects on
investment. Baseline forecasts do not incorporate the effects of policy
proposals by the new administration, as their scope is still uncertain.
Productivity has been stagnant in recent years, constraining potential
output growth. Despite generally subdued activity, unemployment andinflation continued to move closer to policy objectives, signaling further
policy normalization.
A. Contributions to GDP growth

B. Wage growth

Percentage points

Percent
5.0

Exports
Consumption
GDP growth4

Investment
Imports

4.0

3
2

3.0

1

2.0

0

1.0

-1
2014

2015

2016

2017

2018

2019

Median wage growth
Employment cost index

0.0
2002 2004 2006 2008 2010 2012 2014 2016

C. Economic policy uncertainty

D. Impact of a 10-percent rise ineconomic policy uncertainty on
U.S. GDP

Index, 100 = average of 2001-present
400

Percentage points
0.2
0.5

350
0.0
0.0

300
250

-0.2

200

-0.5
-0.4

150
100
50

-1.0
-0.6

0
2010 2011 2012 2013 2014 2015 2016

11

2

3

4
55
Quarterquarter

66

77

88

E. Labor productivity growth

F. Distance to long-run unemployment
and inflation target

Percent, year-on-year, 5-year moving average

Percentage points
0.4

1990-2016 average

4

0.0

3

-0.4

2

-0.8

Current
December '15

1
-1.2

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

0
-1.6
Unemployment

Headline inflation

Sources: Federal Reserve Bank of Atlanta, Federal Reserve Board, Haver Analytics, U.S. Bureau
of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS), World Bank.
B. The Employment Cost Index measures the change in the cost of labor, including wages, benefits,
and other forms of compensation, free from the influence of employment shifts among occupations
and industries. Median wage growth is based on survey data that track the same individuals twelve
months apart. It incorporates changes in industry and job title, as these are two important ways for
employees to increase their compensation. Last observations are 2016Q3 for the Employment Cost
Index, and November 2016 for median wage growth.
C. Policy uncertainty as measured in Baker, Bloom, and Davis (2015). Based on the frequency ofarticles in domestic newspapers mentioning economic policy uncertainty. 7-day moving averageshown. Last observation is December 18, 2016.
D. The model includes, in this order, the U.S. Economic Policy Uncertainty (EPU) index, U.S. stock
price index (S&P 500), U.S. 10-year bond yields, U.S. real GDP and investment growth. Dotted lines
denote 16-84 percent confidence bands.
E. Average growth of output per hour worked in the non-farm business sector. Last observation is
2016Q3.
F. Long-run unemployment is the median long-term projection of the unemployment rate by Federal
Open Market Committee members in December 2016. The Fed’s inflation target is 2 percent. The
latest observations are November 2016 for unemployment and October 2016 for PCE inflation.

However, their overall scope has not yet beenclearly defined; hence, they are not included inbaseline projections. While confidence continued
to improve in the immediate aftermath of theelection, an increase in policy uncertainty, if
persistent, could have a dampening effect on
investment. Against this backdrop, growth isexpected to regain some momentum, reaching 2.2
percent in 2017 and 2.1 percent in 2018. These
projections are unchanged from previous forecasts.
As remaining labor market slack is absorbed andpolicy interest rates approach neutral levels,
growth is projected to slow slightly to 1.9 percent
in 2019, close to its estimated potential rate.
Downward revisions to potential output growth
have coincided with further evidence of stagnant
productivity (Congressional Budget Office 2016;
Federal Open Market Committee 2016). This
reflects in part labor force shifts toward lowerproductivity service activities, as well as a declining
productivity trend within both the manufacturing
and services sectors (Vollrath 2016). The mostproductive firms are growing less rapidly than in
the past, while the firm entry rate has declined,
and flows in and out of jobs have slowed in the
post-crisis period (Decker et al. 2016; Molloy etal. 2016). These factors, combined with slowing
gains in educational attainment, might havecontributed to a slower pace of productivity
growth in recent years (Fernald 2016).
Despite relatively subdued underlying growth, theeconomy has continued to move closer to theFederal Reserve’s full employment and inflation
objectives. The unemployment rate remainedslightly below 5 percent in most of the second halfof 2016. While labor force participation could
recover from current low levels as discouraged
workers return to the labor market, demographicpressures make a return of the participation rate topre-crisis levels unlikely (Aaronson et al. 2014).
Following a policy interest rate hike in December
2016, a further normalization of monetary policy
is expected throughout the forecast period, as
long-term inflation expectations have recovered
and growth is predicted to remain above potential.
However, the federal funds rate is expected tostabilize over the long run at a lower level than inprevious cycles, reflecting further evidence of a

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Despite the Brexit vote in June 2016, confidence in the Euro Area hascontinued to improve. However, investment rates are low, particularly incountries that were most affected by the Euro Area debt crisis. Borrowing
costs have eased considerably since the introduction of a negative interest
rate policy in June 2014, but concerns about banking sector profitability
intensified in 2016. Despite further monetary policy accommodation,
headline inflation remains close to zero, and long-term inflation
expectations are still below the European Central Bank’s policy target.
A. Change in economic sentimentsince Brexit vote

B. Investment rate in selected
countries

Change in sentiment index

Percent of GDP
Greece, Ireland, Italy, Portugal, Spain
Rest of Euro Area
25

2.0
1.9
1.8
1.7

20

1.6
1.5

Changes in business regulations could also support
private-sector activity, while a relaxation ofenvironmental standards could have importantsectoral implications. If implemented, plansto retreat from trade agreements or to raise tariffs
and trade barriers could lead to retaliatory action
and have negative effects on the outlook for
the U.S. economy. The renegotiation of NAFTA
could have particularly significant effects onregional trade and industrial prospects (Noland etal. 2016).
1The “Risks to the outlook” section of this chapter presents further
discussion.

D. Actual inflation and long-term
inflation expectations

Percent
0
-0.2
-0.4
-0.6
-0.8
-1
-1.2

Percent, year-on-year
Inflation expectations
Headline inflation
4
ECB target
3

2016

2014

2012

2010

2008

2006

2004

2000

Euro Area

C. Change in interest rates since theintroduction of negative interest rate
policies in June 2014

1
0

2016

2014

2012

2010

2008

2006

-1

2004

ECB repo

ECB deposit

EuriborMortgage loans

2

Corporate loans

In terms of the proposals suggested by the new
U.S. administration, simulations indicate that theplanned reduction in corporate and personal
income taxes could—if fully implemented andwithout consideration for other policy changes—
increase U.S. GDP growth projections to 2.2-2.5
percent in 2017 and 2.5-2.9 percent in 2018.
Estimates vary depending on the timing of the tax
cuts, the reaction of monetary policy authorities,
and how businesses and households adjust their
expectations to policy changes. Given limited
details to date about the overall scope of all fiscal
measures that the new administration plans to
implement, including plans to stimulate
infrastructure investment and cuts in other federal
government outlays, it is difficult to rigorously
examine their net effect on the outlook for the
U.S. economy.1

U.K.

2002

15

1.4

2002

The fiscal policy stance is assumed to be broadly
neutral to growth in 2017. However, the newadministration has signaled intentions to pursue
more expansionary fiscal policies, including tax
cuts and measures to upgrade infrastructure,
which could lead to stronger growth in the shortterm. In general, a fiscal stimulus of 1 percent of
GDP could be expected to raise U.S. GDP by
between 0.7 and 1.5 percent after 2 years,
depending on the amount of remaining economic
slack and the reaction of monetary policy
authorities (Laforte and Roberts 2014; Brayton,
Laubach, and Reifschneider 2014; Whalen andReichling 2015).

FIGURE 1.5 Euro Area

2000

persistently low real equilibrium interest rate
(Holston, Laubach, and Williams 2016).

9

CHAPTER 1

Sources: European Central Bank, European Commission, Eurostat.
A. European Commission economic sentiment is an average of business climate and consumer
confidence indexes. Change from May 2016. Last observation is November 2016.
B. Weighted average of investment rates across sub-groups of Euro Area countries. Last observationis 2016Q3.
C. Euribor is the Euro interbank offered rate. Loan and mortgage rates are for newly originatedlending. The ECB deposit rate is the rate offered to banks on their excess reserves held on depositat the ECB. The ECB repo rate is the marginal refinancing operations rate that the ECB sets on its
repurchase operations in the open market. Percentage point change since May 2014. Lastobservation is November 2016.
D. Long-term inflation expectations are derived from 5-year 5-year forward swap rates. Lastobservation is November 2016.

Euro Area
Euro Area growth slowed from 2 percent in 2015
to 1.6 percent in 2016, as both domestic demandand exports lost momentum. Confidence in theEuro Area has been resilient following the United
Kingdom’s vote to exit the European Union (EU)in June 2016 (Figure 1.5). The U.S. election
results could also heighten policy uncertainty inEurope. A rebound in oil prices, from their troughin early 2016, implies diminished support to real
income and private consumption growth relative

10

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.6 Japan
Wage growth continued to be dampened by a rising share of part-timeworkers. With the Bank of Japan already holding around 40 percent ofgovernment debt, the central bank decided to shift its policy focus towards
a stabilization of long-term interest rates around zero. The appreciation of
the yen during most of 2016 put downward pressure on profit margins forexporters. To support growth, the government announced a series of fiscal
stimulus measures, including new public spending amounting to 1.2
percent of GDP.
A. Full-time and part-time employment

B. Bank of Japan holdings ofgovernment debt

Index, Jan. 2010=100
130

Percent
70
Percent of central government securities
Percent of GDP
60

Full-timePart-time

120

50
40

110

30
20

100

10

C. Exchange rate and export prices

D. Discretionary fiscal measures

Index, 100 in 2010
Export price (in yen)
130
Export price (in contract currency)
Nominal effective exchange rate
120

Percent of GDP

2016

2014

2012

2010

2008

2006

2004

2002

2016

2015

2014

2013

2012

2011

2010

2000

0

90

4
3

110

90

1

80

0

70
2010

2012

2014

2016

Aug-08
Oct-08Dec-08Apr-09Dec-09Sep-10
Oct-10
Oct-11
Nov-12
Jan-13
Dec-13
Dec-14
Nov-15Aug-162

100

Sources: Bank of Japan; Haver Analytics; Ministry of Finance; Ministry of Health, Labor and Welfare.
A. 12-month moving average. Last observation is October 2016.
B. Data include bonds for fiscal investment and loan program as well as central government
securities. Last observation is 2016Q3.
C. An increase in the nominal effective exchange rate denotes an appreciation. Last observation isNovember 2016.
D. Budgeted additional discretionary expenditure from the central government.

to the 2014-15 period. Investment rates are
particularly low in the Euro Area periphery, withincreased policy uncertainty likely weighing
further on capital spending in 2017. Labor market
and credit conditions continued to improve in2016. Employment recouped its pre-crisis levels,and the unemployment rate ebbed further, albeit
from elevated levels and with wide cross-country
variations.
Negative policy interest rates, combined withlarge-scale asset purchase programs by theEuropean Central Bank, led to a noticeable easingof borrowing costs and generally had a positiveeffect on lending flows (Arteta et al. 2016;

Rostagno et al. 2016). However, renewed
concerns about banking sector profitability andelevated non-performing loans in some countries(e.g., Italy) could continue to constrain Euro Area
credit and contribute to market volatility. Despiteongoing monetary policy easing, headline and core
inflation remain significantly below target. The
longer this undershooting continues, the greater
the risk of inflation expectations becoming deanchored from policy objectives (Łyziak andPaloviita 2016). Fiscal policy was slightly
expansionary in 2016 partly as a result of refugeerelated outlays, but is expected to be broadly
neutral to growth in 2017. Fiscal sustainability
concerns remain in a number of countries,
although debt services costs declined in most EuroArea countries, thanks to the exceptionally low
interest rates across the maturity spectrum.
Uncertainty about the Brexit process is expected toweigh on growth in 2017-18 in the United
Kingdom and, to a lesser extent, in the Euro Area.
Growth in the Euro Area in 2017 is projected toslow marginally to 1.5 percent, as the unwindingof the income boost associated with lower oil
prices, increased policy uncertainties, andlingering banking sector concerns offset thebenefit of more favorable financial conditions.
Growth is expected to remain broadly stable in2018 and 2019, at 1.4 percent, leading to a very
gradual narrowing of the output gap.
Japan
Following the release of new and revised national
accounts data, growth in Japan is now estimated at
1 percent for 2016. Investment and exports weregenerally weak, while private consumption showedsome signs of improvement after two years ofcontraction. Labor shortages underlay a modest
increase in wage growth; however, the gains were
dampened by low inflation expectations and arising share of part-time employment (Figure 1.6).
In September 2016, the Bank of Japan changed its
policy focus from a quantitative target forgovernment bond purchases to a more flexible
approach aimed at stabilizing long-term interest
rates around zero. The decision could help
alleviate constraints associated with the increased
scarcity of bonds eligible for purchase by the

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Growth in China slowed slightly in 2016 and continues to rebalance fromindustry to services. Investment growth has continued to deceleratefrom post-crisis peaks, with its drivers shifting to policy-induced
infrastructure investment. Credit growth moderated but still surpasses
nominal GDP growth.
A. GDP growth

B. Contribution to fixed-asset
investment growth

Percent, year-on-year
16
14
12
10
8
6
4
2
0

Industry

GDP

Percentage points
35
State-owned and holding
30
25

10
5

2015

2016YTD

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2016
Q3

2015

2014

2013

2012

0

4
2
0
2013

2014

2015

2016

2019

6

2018

8

2017

10

2016

12

2015

14

2014

Percentage points
Net exports
Gross capital formation
Consumption expenditure
12
Average GDP growth 1990-2015
10
8
6
4
2
0
-2

Overseas loans
Non-financial enterprises
Households

2013

Percentage points

2012

D. Contribution to GDP growth

2011

C. Contribution to loan growth

Sources: China National Bureau of Statistics, Haver Analytics, World Bank.
A. Last observation is 2016 Q3.
B. State-owned and holding refers to either state-owned enterprises or enterprises whose shares are
owned by both public and private sectors. 2016YTD refers to data up to November 2016.
C. Non-financial enterprises include both public and private enterprises. 2016 is the average ofJanuary to November 2016.
D. Shaded area indicates forecasts.

infrastructure investment and on efforts tostimulate household credit.

China
Growth in China is estimated to have slightly
decelerated to 6.7 percent in 2016. As part ofongoing economic rebalancing, growth has been
concentrated primarily in services, while industrial
production has stabilized at moderate levels(Figure 1.7; Zhang 2016). The internal
rebalancing is also evident on the demand side:
consumption growth has been strong, while
investment growth has continued to moderatefrom the post-crisis peak (Lardy and Huang
2016). The decline in investment growth wasconcentrated in the private sector; investmentby the non-private sector accelerated in 2016.
Fiscal and credit-based stimulus measures
supported growth in 2016, focusing on

Private15

16

Overall, growth projections for 2017 and 2018
have been revised up—to 0.9 percent and 0.8
percent, respectively—but remain constrained by
the low growth potential implied by a shrinking
and aging labor force and heightened policy
uncertainty in major trading partners. This, inturn, contributes to diminished expectations,which negatively affect investment spending aswell as fiscal and monetary policy effectiveness.
Growth is projected to slow to 0.4 percent in
2019, mainly resulting from the planned
consumption tax hike.

Services20

2011

To support growth, the government announced aseries of measures. These included postponementof a planned consumption tax hike (from April
2017 to October 2019) and a fiscal stimulus
package, with new public spending amounting to
1.2 percent of GDP. This new spending is
expected to add around 0.3 percentage point togrowth in 2017.

FIGURE 1.7 China

2010

central bank, and at the same time mitigate
adverse effects of negative long-term yields on
financial institutions (Arslanalp and Botman
2015; Iwata et al. 2016). Despite the policy shift,
the yen appreciated in the earlier part of 2016.
Since Japanese exports are often denominated in
destination currencies, this dampened profits andinvestment in 2016. However, the yen depreciatedrapidly towards the end of the year, paring most of
its earlier gains.

11

CHAPTER 1

Credit growth, which has been moderating sincelate 2015, stabilized during 2016 but remained
well above the pace of nominal GDP growth. On
the back of a continued real estate boom, loans tohouseholds accounted for an increasing share ofcredit extension in 2016. Reflecting household
lending activity, household debt to GDP has
surpassed 40 percent of GDP, up almost 10
percentage points over the past three years (BIS2016). While credit growth to the industrial sector
has moderated, the stock of credit to the nonfinancial corporate sector continued to rise,reaching 170 percent of GDP in 2016.
Partly as a result of real estate lending, housing
prices reached new heights, especially in major

12

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.8 Global trade
Global goods trade volumes stagnated in the first half of 2016, reflecting
softening demand from advanced economies and still-contracting imports
from major commodity exporters. Weak investment growth has also
contributed to subdued capital goods trade. The slowdown in global value
chain integration seems to have intensified in recent years, contributing toa lower income elasticity of trade. A gradual recovery in global trade is still
expected in 2017 and 2018, but at a weaker pace compared to its longterm performance partly due to a less favorable policy environment.
A. Global goods trade growth

B. Global capital goods trade andinvestment

Percent
30

Index, 2000=100
350

Dotted line: 1992-2008 average
Volume
Value

300

20

Capital goods trade
Gross fixed capital formation
Pre-crisis trend

250

10

200
0

150

-10

100

2012

2014

2016

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

50

-20
2010

Growth is projected to moderate to 6.5 percent in2017 and to 6.3 percent in 2018-19, reflecting
soft external demand, heightened uncertainty
about global trade prospects, and, critically, slower
private investment. Macroeconomic policies are
expected to continue supporting activity to help
smooth the adjustment of output in overcapacity
sectors (World Bank 2016a). Rebalancing fromindustry to services, and from investment to
consumption, is expected to moderate. Progress in
reducing financial excesses will likely be modest,
barring deep structural reforms with respect tostate-owned enterprises (SOEs) and corporate
restructuring (IMF 2016a).

1990-2008 average

2014
2015
2016
2017
2018

2014
2015
2016
2017
2018

2014
2015
2016
2017
2018

Global trends

2014
2015
2016
2017
2018

2011-2015

Percent
8
6
4
2
0
-2
-4
-6

2006-2010

Percent
6
5
4
3
2
1
0
-1

2001-2005

D. Import volume growth

1991-2000

C. Global value chain growth

notwithstanding, the renminbi remains markedly
above its 2005 level in trade-weighted terms andbroadly in line with fundamentals. The renminbi
was added to the basket of currencies that makeup the International Monetary Fund’s Special
Drawing Right in October 2016.

World

Advanced
economies

EMDE
Commodity
exporters

EMDE
Commodity
importers

Sources: CPB Netherlands Bureau for Economic Policy Analysis, Haugh et al. (2016), World Bank,World Trade Organization.
A. Average of global merchandise imports and exports. Last observation is September 2016.
B. Capital goods trade and gross fixed capital formation expressed in current U.S. dollars. Trend line
shows the pre-crisis (2003-08) trend of the average of capital goods trade.
C. Global value chain growth indicator as computed by Haugh et al. (2016) is a partial measure ofparticipation in global value chains based on import values of intermediate goods, divided by thevalue of final domestic demand. The indicator is cyclically adjusted.
D. Shaded area indicates forecasts. Goods and services import growth consistent with national
accounts data. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.

cities (Chen, Wang, and Liuc 2015). In 2016,prices rose more than 30 percent in Shanghai,
Shenzhen, and Xiamen, although they showedsigns of stabilization in recent months, reflecting
tighter property regulations. Producer pricedeflation came to halt as input prices stabilized,
but CPI inflation remained below the central
bank’s 3-percent target throughout 2016.
Despite some easing, capital outflows from China remained sizable and continued to put
downward pressure on the currency. During 2016,
the renminbi depreciated around 7 percent against
the U.S. dollar and around 5 percent in nominal trade-weighted terms. These movements

Global trade growth slowed further in 2016 to its
weakest pace since the global financial crisis. Soft
imports from major economies continued to depress
trade flows, compounded by structural factors andincreased protectionism. Financial market conditions
for EMDEs, which were generally benign for most of
2016, tightened significantly following the U.S.
elections. Commodity prices stabilized in the course of2016, and are expected to gradually recover.
Heightened policy uncertainty in the United Statesand Europe is likely to weigh on global trade andcapital flows.
Global trade
Global trade growth in 2016 recorded its weakest
performance since the global financial crisis.
Stagnant goods trade for most of 2016 (Figure1.8) was exacerbated by a cyclical drawdown ininventories across advanced economies andcontracting imports in China and in majorcommodity exporters. The sharp drop in oil prices
from mid-2014 to early 2016 could havecontributed to the weakness in global trade overthat period, as income losses were highly
concentrated among a few countries, while gains

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

were diffused among many—import demand isgenerally more sensitive to large changes inincome than to smaller changes (World Bank
2015a). The observed slowdown in global
investment in 2015-16 played an important role aswell, as capital goods account for about one thirdof world goods trade.
Structural forces at work include a slower pace oftrade liberalization and of global value chain
integration (Constantinescu, Mattoo, and Ruta
2016a). In an environment of weak global trade,stagnant real income gains in major advanced
economies, and marked currency movements
between major reserve currencies, protectionism
has been slowly rising. For example, in 2016,
G20 countries have taken more trade-restrictive
measures than trade-facilitating ones (Evenett andFritz 2016). Although subsidies and tradesafeguard measures are still by far the mostcommon forms of trade distortion, there has
been a shift toward more opaque measures, such as
localization requirements, export incentives, andother trade finance measures. The appetite forfurther trade liberalization has waned, particularly
among major advanced economies, which inturn appears to have contributed to the global
trade slowdown more than the rise in temporary trade barriers (Constantinescu, Mattoo, andRuta 2015).
The maturation of global value chains also
contributed to a lower income elasticity of trade(the additional trade generated by an increase inglobal GDP). This trend, which had been
observed prior to the global financial crisis, hasintensified in recent years (OECD 2016a; Crozet,
Emlinger, and Jean 2015; Haugh et al. 2016).
Among major advanced economies, the slowdown
in global value chain participation is particularly
visible in the United States and Japan. Among
EMDEs, China’s move toward more maturedomestic intermediate production has also
contributed in lowering its trade elasticity (Keeand Tang 2015). However, most EMDEs still
have a large untapped potential to move up thevalue chain, by shifting to more complex
and higher domestic value-added products(Taglioni and Winkler 2016; Ferrantino andTaglioni 2014).

CHAPTER 1

Services trade continued to show greater resilience
than goods trade because of its nature. Services
cannot be stored, often represent a fixed cost in
production processes, and are less sensitive tochanges in credit and trade finance conditions(Borchert and Mattoo 2010; Ariu 2016).
A gradual recovery in global trade is still expected
in 2017 and 2018, supported by a projected
rebound in import demand from large EMDEs.
However, the pace of the recovery is slower thanpreviously expected because of downward revisions to growth prospects in major advanced economies, persistent weakness in global investment,
and slower or stalled trade liberalization amid uncertainty about trade policy in the United Statesand Europe.
Financial markets
While capital inflows to EMDEs generally recovered in 2016, a rapid increase in U.S. bond yields
and an appreciation of the U.S. dollar following
the U.S. elections led to a sudden tightening offinancing conditions for EMDEs toward the endof 2016. In some cases, this tightening lead to significant currency depreciations, portfolio outflows,
and slowing debt issuance.
The sudden rise in U.S. yields reflected an uptick
in long-term inflation expectations and prospectsof a faster normalization of U.S. monetary policy,
which contributed to a recovery in term premiums
from previous record-low levels (Figure 1.9). U.S.
long-term yields increased to the highest levels
since September 2014, although they remained
below post-Taper Tantrum peaks in 2013-14. In
contrast, expectations of continued monetary
policy accommodation by the European Central
Bank and the Bank of Japan put downward
pressure on global bond yields and term premiums
for most of 2016 (Hordahl, Sobrun, and Tuner
2016). By the end of 2016, bond yields up to a
five-year maturity were still negative in economies
accounting for nearly 20 percent of global GDP.
Prior to November 2016, record-low advancedeconomy interest rates contributed to a resumption of capital flows to emerging markets,
reinforced by a stabilization in commodity prices.

13

14

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.9 Global financial conditions
U.S. long-term yields increased markedly towards the end of 2016,reflecting prospects of further monetary policy normalization and a reboundin term premiums. However, U.S. and global bond yields remain low byhistorical standards. Amid expectations of continued monetary policy
accommodation in the Euro Area and Japan, bond yields up to 5-year
maturity remain negative in countries that account for nearly 20 percent of
global GDP.
A. U.S. term premium and policy rate
expectations

B. Share of world GDP with negativeinterest rates

Percent
10-year average policy rate expectations
6
10-year term premium
5Percent of world GDP
30
Policy rate

45-year bond yield

20

3
2
1

10

exploration and have reduced the profits andreinvested earnings that supported past inflows.
FDI growth is now well below long-term averages
in both commodity-importing and commodityexporting regions. Subdued FDI flows tocommodity exporters add to external financing
needs at a time when fiscal and current accountpositions are already under pressure. FDI flows tolarge commodity importers were generally resilientin 2016. In sum, capital flows to EMDEs
recovered some ground during the first threequarters of 2016, following the post-crisis lows
reached at the end of 2015, but stayed subdued byhistorical standards and showed renewed signs of
weakness toward the end of the year.

0

2016

2014

2012

2010

2008

2006

2004

2002

2000

-1
0
Jan-14Jan-15Jan-16

LatestSources: Bloomberg, Federal Reserve Bank of New York, World Bank.
A. Shows the decomposition of 10-year U.S. Treasury bond yields into policy rate expectations and aterm premium based on a five factor no arbitrage yield curve model. See Adrian, Crump, and Moench(2016) for more detail. Last observation is December 19, 2016.
B. Share of world real GDP (in 2010 US$) accounted for by economies with negative policy rates and5-year government bond yields. Monthly averages. Last observation is December 19, 2016.

This led to renewed appetite for emerging market
assets and to a drop in sovereign credit spreads,
benefiting in particular large commodity exporters(Figure 1.10). EMDE spreads have tightened sinceNovember 2016, but remained notably below
levels prevailing at the start of the year. Demandfor higher-yielding debt securities during 2016 has
led many EMDEs, particularly oil exporters facing
declining fiscal revenues and rising deficits, toissue foreign-currency debt. During the first threequarters of the year, strong issuance activity in
Latin America and the Caribbean, Europe andCentral Asia, and the Middle East and North
Africa offset reductions in Sub-Saharan Africa,
where access and cost of primary bond issuances
remained severely constrained. Sovereign bondissuance by EMDEs has slowed appreciably since
the U.S. elections, while corporate bond issuancegenerally remained weak throughout 2016.
FDI flows to EMDEs remained subdued
throughout 2016, albeit with significant
differences across commodity importers andexporters.
Amongcommodity
exporters,
persistently low commodity prices have reduced
the attractiveness of investment in mining and

EMDEs could continue to face challenging
financial market conditions amid rising global
bond yields, a strong U.S. dollar, and heightened
policy uncertainty. However, capital inflows
are still projected to recover modestly in 2017,
assuming improved growth prospects among
commodity exporters, rising commodity prices,
and a gradual normalization of U.S. policy interest rates.
The benefit for FDI from continued liberalization
measures in some large EMDEs, as well as an
expected pick-up in mergers and acquisitions, may
be partly offset by heightened policy uncertainty
in the United States and Europe as investors bracethemselves for downside risks. Portfolio and shortterm debt flows could be supported by astabilization in credit ratings for EMDEs,
assuming low (albeit gradually increasing) global
interest rates and a continued recovery incommodity prices. In contrast, cross-border
syndicated bank lending to EMDEs is likely toremain feeble, reflecting tighter lending standards
driven by de-risking, regulatory changes, and weakbank profitability. Unconventional monetary
policies designed to support domestic lending insome advanced economies might also have had
unintentionally negative effects on cross-borderbank flows (Forbes, Reinhardt, and Wieladek2016). Despite a projected recovery, capital
inflows as a percent of EMDE GDP should
remain significantly below averages over the 200008 and 2010-14 periods.

GLOBAL ECONOMIC PROSPECTS | JANUARY 201715

CHAPTER 1

Commodities

FIGURE 1.10 Financial conditions in EMDEs

Crude oil prices have recovered from a low of $30
per barrel (bbl) at the start of 2016, but are still
half of their pre-2015 levels (Figure 1.11). The oilmarket continues to rebalance, as consumption
rises while non-OPEC supply declines—notably
in the United States, where oil output is down 12
percent from its peak in early 2015. However,global oil inventories remain high, particularly in
the United States. After averaging $43/bbl in2016—an annual decline of 15 percent relative to2015, despite the gradual increase throughout theyear—oil prices are expected to average $55/bbl in2017, up 28 percent from 2016 levels.

A sudden rise in U.S. bond yields since early November led to a renewedtightening of external financing conditions for EMDEs and, in some cases,
significant currency depreciations and portfolio outflows. Prior to the endyear sell-off, the demand for EMDE assets was sustained for most of 2016,
and sovereign bond spreads remained below levels prevailing at the startof the year. International bond issuance increased significantly in Latin
America and the Caribbean and in the Middle East and North Africa. While
capital flows to EMDEs recovered some ground during 2016, theyremained subdued by historical standards.
A. Emerging market currency andequity indexes
Index, Jan. 1, 2014 = 100
110

OPEC’s ability to guide global oil prices higher
will likely be challenged by the presence ofunconventional oil producers, notably U.S. shaleoil, which can respond rapidly to changing market
conditions (Special Focus). Rising prices havealready led to a rebound in shale drilling, and U.S.
production is expected to bottom in 2017.
Moreover, average costs have fallen markedly in

Basis points
700

100
80

500

70

Jul-16

Jan-16

Jul-15Jan-15

Jul-14200

Jan-14Jul-16

Jan-16300

Jul-15Jan-15Jan-1440

400
Commodity prices
Currencies
Equities

Jul-1450

Commodity importers
Non-oil commodity exporters
Oil exporters

600

90

60

Following two years of unrestrained output togain market share, OPEC decided at its November
meeting to limit production to 32.5 million
barrels per day (mb/d) in the first half of 2017—
down 1.2 mb/d from October 2016 productionlevels—with the possibility of an extension of thislimit for the remainder of the year. This decision
represented the first agreed production cut by
OPEC since 2008. In a subsequent meeting inearly December, eleven non-OPEC countries
pledged to cut nearly 0.6 mb/d, with Russia
expected to account for about half of the
reduction. If implemented in full, these
agreements could help bring crude oil inventories
back to historical balance during the first half of2017. If the cuts are sustained into the second halfof 2017, stock draws could lead to tighter market
conditions. Nevertheless, formal commodity
agreements in the past had limited ability to
influence market conditions over extended periodsof time (Baffes et al. 2015; World Bank 2016b).
The possibility of partial compliance and thepossibility of higher production from Libya andNigeria could result in a more gradual drawdownof oil inventories throughout 2017.

B. Emerging market bond spreads

C. EMDE bond issuance

D. Total capital inflows to EMDEs

US$, billions
120
2015 2016

Percent of GDP
10

100

8

80

July-November
January-June

60
40

China
Commodity importers ex. China
Commodity exporters
Total
2000-2016 average

6
4
2

20

0

0

-2
LAC

EAP

MNA

ECA

SAR

SSA

2010

2012

2014

2016

Sources: Bloomberg, Dealogic, J.P. Morgan, MSCI, World Bank.
A. Currencies refers to the J.P. Morgan Emerging Markets Currency Index. Equities are the MSCIEmerging Markets Index. Commodities are the Standard and Poor’s GSCI Commodities Index. Lastobservation is December 19, 2016.
B. For each country, the EMBI bond spread is calculated as the average spread of the country’s
sovereign debt over their equivalent maturity U.S. Treasury bond. Median across each countrygroups. Last observation is December 15, 2016.
C. EAP is East Asia and the Pacific, ECA is Eastern Europe and Central Asia, LAC is Latin America
and the Caribbean, MNA is the Middle East and North Africa, SAR is South Asia, and SSA is SubSaharan Africa. Includes sovereign and corporate international bond issuance.
D. Total capital inflows consistent with BPM6 balance of payments data. Last observation 2016Q2.

recent years because of efficiency gains andmanagerial improvements, leading to expectationsof a sizable increase in U.S. shale activity once oil
prices reach $60/bbl.
As the stock overhang is expected to graduallyunwind, oil prices are projected to increase
from $43/bbl in 2016 to $55/bbl in 2017. This
represents an uptick from June projections,when oil prices for 2016 and 2017 were forecast toreach $41/bbl and $50/bbl, respectively. The
outcome of the U.S. election might also lead tosome policy-induced changes in energy market
fundamentals, but such changes are likely to be

16

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.11 Commodity markets
Commodity prices stabilized over the course of 2016, and are expected togradually recover in 2017-19. The U.S. oil rig count has shown signs ofbottoming out, following a rebound in oil prices. Agricultural prices areprojected to remain broadly stable, with global stocks of the three key
grains at multi-year highs.
A. Commodity prices

B. Changes in commodity prices

Index, nominal term, 2010=100
EnergyAgriculture

Metals180

Percent
50
30

160
140

10

120

-10

100

-30

80

2014-162017-19

-50

60

-70

40
2008

2010

2012

2014

C. U.S. oil rig count and oil price
US$/bbl150

MetalsAgriculture

D. Stock-to-use ratios

Rig count
1,800

Oil price, WTI (LHS)
US oil rig count (RHS)

Energy

2016

Ratio
0.4

Range 2013-16

2016

1,500

125

1,200

100

0.3

900
75

600

2016

2015

2014

2013

2012

2011

2010

0

2009

25

2008

300

2007

50

0.2

0.1
Maize

Wheat

Rice

Sources: Baker Hughes, Bloomberg, U.S. Department of Agriculture, World Bank.
A. Latest observation is November 2016.
B. Commodity prices represent actual data up to 2016 and forecasts from 2017 to 2019.
C. Last observation is December 16, 2016.
D. Stock-to-use ratios denote the ratio of ending stocks to domestic consumption and represent ameasure of how well supplied the market is. The last observation (2016-17 crop year) reflects the
December 2016 U.S. Department of Agriculture update.

limited. Less strict environmental regulation in the
United States could potentially contribute tolower oil prices, while geopolitical uncertainty
could make oil prices more volatile. Further
disruptions among politically-stressed producers(Iraq, Libya, Nigeria, and República Bolivariana
de Venezuela, with the latter holding the world’s
largest reserves) could exert additional upward
pressures.
Metals prices have risen from lows in early 2016
on strong demand, partly from China’s stimulus
to the property and construction sectors. Supply
reductions for a few commodities—including zincand nickel—have also been a factor. Averageannual metals prices dropped in 2016, but are
expected to rise marginally in 2017 as markets
slowly tighten. Metals price risks depend criticallyon demand from China, given that the country

accounts for more than half of global metals
consumption. Supply risks entail further outagesin Asia, and China’s attempt to reduce excess
capacity in steel, aluminum, and coal. The
direction of U.S. policies after the elections mightalso induce some volatility in metal prices. Greater
emphasis on infrastructure could lead to higher
metal consumption in the United States, puttingsome upward pressure on prices; however, more
protectionist trade policies might negatively affectmetals demand, particularly from China.
Agricultural prices are projected to remain broadly
stable in 2016 and 2017. Supplies for mostcommodities are adequate. Fears of supply
disruptions in the Southern Hemisphere earlier inthe year due to La Niña have diminished.2 Stocks
for the three key grains (maize, wheat, and rice)
are at multi-year highs. Global crop conditions
have improved for most grains and oilseeds. Since
agricultural production is energy-intensive, lower
energy costs continued to have a dampening effecton prices in 2016. In addition, low oil prices
reduce the incentive to divert land use away fromfood to biofuels. Indeed, global biofuel production
grew at an annual rate of just 1 percent in the past
2 years, versus 17 percent during the preceding
decade (World Bank 2016c). However, theexpected recovery in energy prices in 2017 could
halt these downward pressures.

Emerging and developing
economies: Recent
developments and outlook
EMDEs grew by an estimated 3.4 percent in 2016,
slightly below June projections. Among commodity
exporters, output expanded an estimated 0.3 percent,as some improvement in Brazil and Russia and amodest increase in commodity prices was offset byfurther weakness in other exporters. In commodity
importers, growth in 2016 is estimated at 5.6
percent, reflecting resilient domestic demand andgenerally accommodative macroeconomic policies.

2La Niña is characterized by unusually cold ocean temperatures inthe Equatorial Pacific, compared to El Niño, which is characterized
by unusually warm ocean temperatures in the same region. La Niña
often follows El Niño.

GLOBAL ECONOMIC PROSPECTS | JANUARY 201717

CHAPTER 1

EMDE growth is projected to pick up to 4.2 percent
in 2017 and to an average of 4.7 percent in 201819, mainly on a recovery in commodity exporters
supported by a gradual increase in commodity prices.
However, a number of factors—including advancedeconomy policy uncertainty and slowing productivity
growth—are expected to weigh on the medium- andlong-term EMDE outlook.

FIGURE 1.12 EMDE developments

A. GDP growth

B. Contribution to EMDE growth

Recent developments

Percent, year-on-year
Commodity exporters
10
Commodity importers
8
Commodity importers ex. China

Percentage points
12

6

8

4

6

Growth in commodity-exporting EMDEs in 2016
was supported by some stabilization in domestic
demand, following a contraction in 2015. Private
consumption continued to contract in Brazil andRussia, but at a slowing pace as confidence
improved. Investment also contracted again in
2016, especially in Brazil, Colombia, and Russia.
More generally, subdued investment across

0
-2

2016

2015

2014

2013

2012

2011

-2

2003-08

2010-14

2015

2016

C. Contribution to GDP growth

D. Growth in EMDE commodity
exporters (excluding BRICS)

Percent

Percent
6

Exports
Consumption

10

Investment
Imports

6

4

2

EMDE
commodity
exporters

E. EMDE investment growth
Percent, year-on-year
15

2016

2015

2016

2015

2011
2012
2013
2014
2015
2016
EMDE

2016

2011
2012
2013
2014
2015
2016
Commodity
importers (ex.
China)

2015

2011
2012
2013
2014
2015
2016
Commodity
exporters

2015

0

-6

2016

2

-2

EMDE
EMDE metal
EMDE
energyexporters agriculture
exporters
exporters

F. Share of EMDEs with investment
growth below its long-term average

EMDEs
1990-2008 average
2003-08 average

Percent of countries
Commodity exporters
100
Commodity importers
80
Share = 50

10

60
40

5

20

2015

2014

2013

2012

2011

2016

2015

2014

2013

2010

0

0

2012

Low commodity prices and weak global trade
continue to create challenging conditions forcommodity-exporting EMDEs (Reinhart, Rogoff,
and Trebesh 2016). This group grew by an
estimated 0.3 percent in 2016, markedly below
the long-term average of 2.8 percent. Relative toJune projections, growth in these economies has
been slightly downgraded, as improvements insome of the largest exporters—most notably
Russia and Brazil—and a modest increase incommodity prices were offset by further weakness
in other exporters.

2

0

2011

Commodity-exporting EMDEs

10

India
RussiaCommodity exporters
Commodity importers
China
BrazilAverage 1990-2008 growth

4

2

2010

Growth in EMDEs reached an estimated 3.4
percent in 2016, slightly below June forecasts andthe subdued pace in 2015, and well below thelong-term average of 4.4 percent. Weak global
trade was offset by some pickup in domestic
demand and, for most of 2016, by generally
benign financing conditions—although the latter
experienced a substantial tightening toward theend of the year, reflecting an appreciation of the
U.S. dollar and a rise in global bond yields. The
marked divergence between commodity exporters
and importers continued, although with notablevariations within each group (Figure 1.12).
Reflecting these divergences, growth incommodity importers in 2016 accounted foralmost the totality of EMDE growth.

Commodity exporters grew much more slowly than commodity importers in
2016, with the latter accounting for most of the estimated aggregate EMDE
growth rate of 3.4 percent. In commodity importers, growth continued to besupported by solid domestic demand. Although investment growth isstronger in commodity importers than in exporters, it is below long-term
averages in more than half of all countries within both sub-groups.

Sources: Haver Analytics, International Monetary Fund, World Bank.
A. Weighted averages of GDP growth. Last observation is 2016Q3.
B. Commodity importers exclude China and India. Commodity exporters exclude Russia and Brazil.
D. Growth is simple average of each country groups excluding BRICS. Gray bars denote inter-quartile
ranges.
E. Weighted averages. Includes 28 EMDEs with available quarterly data. Long-term averages startin 1991 for EMDEs and are based on annual data. Last observation is 2016Q2.
F. Long-term averages are country-specific for 1990-2008.

commodity exporters reflected policy tightening,
weakness in extractive sectors, soft growthprospects, political and policy uncertainty, andcontinued adjustment to the earlier terms-of-trade
shock (Chapter 3). In contrast, investment growth
picked up in several exporters in East Asia and18

CHAPTER 1

Pacific, Eastern Europe and Central Asia, andLatin America and the Caribbean.
Variations in growth among commodity exporters
in 2016 reflected the pace of policy adjustment to
low commodity prices and country-specificdomestic challenges (Gervais, Schembri, andSuchanek 2016). In general, because of the sharperand more recent decline in their terms of trade,growth in energy exporters (Angola, Azerbaijan,
Kazakhstan, Nigeria) fell well behind that in metal
and agriculture exporters (Ethiopia, Kenya, Peru,
Tanzania, Uganda).
Although Brazil and Russia, which together
account for about two-fifths of commodityexporting EMDE output, suffered a second
consecutive year of recession in 2016, they havebeen showing signs of improvement. In Russia,
the stabilization in oil prices and the authorities’
policy response—exchange rate adjustment,banking sector capital and liquidity injections—improved the short-term outlook, helped restore
confidence, and stabilized the financial system(IMF 2016b; World Bank 2016d). In Brazil, arebound in confidence following moves toalleviate political uncertainty, combined withimproved terms of trade, helped to slow the paceof output contraction (IMF 2016c).
In general, growth was resilient in more diversified
commodity exporters, which avoided severe
growth slowdowns in 2016 (Chile, Colombia,
Costa Rica, Indonesia, Kenya, the Kyrgyz
Republic, Malaysia, Myanmar, Peru, Tajikistan,
Tanzania, Uganda, Uzbekistan). In many of thesecountries, various favorable domestic and external
factors helped absorb shocks and support theircurrent recovery (Gervais et al. 2016). These
include flexible exchange rates, moderate inflation,
policy buffers, access to concessional sources offinancing, robust foreign direct investment, andstronger growth in their main trading partners. In
some cases, greater fiscal space (Chile, Peru)
provided more room for stimulus in response to
slowing growth (IMF 2016d). In several countries,
previous policy tightening helped improve
confidence and policy credibility (Indonesia,
Malaysia). These factors, combined with relatively
benign external financing conditions for most of
2016, helped ease pressures on exchange rates and

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017asset prices and allowed some central banks(Armenia, Indonesia, Malaysia, the Kyrgyz
Republic) to move to a policy easing cycle.
In contrast, growth decelerated sharply in 2016 ina number of exporters in Sub-Saharan Africa(Angola, Chad, the Democratic Republic ofCongo, Nigeria, Mozambique, South Africa,
Zimbabwe), Latin America and the Caribbean(Argentina, Ecuador), Middle East and North
Africa (Bahrain, Saudi Arabia), Europe andCentral Asia (Azerbaijan, Kazakhstan), and East
Asia and Pacific (Mongolia, Papua New Guinea).
Incomplete policy adjustment to the global
commodity price shock in some countries wascompounded by country-specific domestic
challenges, including droughts and security issues(Nigeria, South Africa).
Balance of payment pressures, currency weakness,and high inflation prompted these countries toembark on or continue policy tightening in thesecond half of 2016 despite soft economic activity(Azerbaijan, Angola, Nigeria, Mozambique,Mongolia—IMF 2016e; IMF 2016f). Afterheavy reserve losses, several large oil exporters
with tightly managed exchange rates (Azerbaijan,
Angola, Kazakhstan, Nigeria) allowed theirexchange rates to weaken in 2015-16 (Horton etal. 2016; Lariau et al. 2016). Fiscal retrenchment
supported external adjustment in the lessdiversified oil exporters, including the Gulf
Cooperation Council (Alan et al. 2012; Behar andFouejieu 2016). Growth in these countries is now
held back by contractions in non-oil activity,
which had previously been supported by public
investment (Azerbaijan, Saudi Arabia—IMF
2015a). As a result, labor market and job prospects
have deteriorated in a range of commodity
exporters.
Commodity-importing EMDEs
In commodity-importing EMDEs, growth isestimated at 5.6 percent in 2016—a slightdowngrade from June projections and below its
long-term average of 6.1 percent. Growth incommodity-importing
EMDEs
excluding
China—a group that accounts for about one thirdof EMDE output—is estimated to havedecelerated to a still-solid 4.3 percent in 2016,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

BOX 1.1 Low-income countries: Recent developments and outlook

Growth in low-income countries (LICs) remained subdued in 2016, slowing marginally to an estimated rate of 4.7 percent.
Low commodity prices, adverse weather conditions, and political and security difficulties were significant factors holdingback output in various countries. Growth slowed among commodity exporters, while remaining unchanged from 2015 forcommodity importers. Despite some modest improvement in 2016, commodity prices are expected to remain low, and fiscal
adjustment needs remain large in commodity-exporting LICs, putting an additional damper on their growth. Overall
growth in LICs is expected to recover moderately, to 5.6 percent in 2017 and 6.0 percent a year in 2018-19, as commodity
exporters continue to adjust. Risks to the outlook remain tilted to the downside. The main external risk is that the modest
expected increase in commodity prices might not materialize, while the main domestic risks lie in worsening drought
conditions and deterioration in political and security situations. Maintaining macroeconomic stability and boosting per
capita growth remain key policy challenges.
Subdued growth. GDP growth in LICs in 2016 isestimated to have edged down to 4.7 percent (Figure
1.1.1). Low commodity prices, adverse weather
conditions, and political and security challenges werefactors that continued to take a toll in various countries.
Severe weather conditions caused a sharp fall inagricultural production in some countries (Ethiopia,
Haiti, Malawi, Mozambique, Rwanda, Uganda),
destroyed infrastructure in some cases (Haiti), andcontributed to food insecurity (Ethiopia, Malawi). The
security situation deteriorated notably in Afghanistan
and South Sudan.
The slowdown was concentrated in the commodity
exporters. GDP contracted in oil exporters (Chad, South
Sudan). In Chad, depletion of oil fields exacerbated thenegative effects of low oil prices on output, while BokoHaram militant attacks hampered economic activity
more broadly. In South Sudan, conflict severely
disrupted oil production. Metals exporters struggled,with growth slowing markedly in the Democratic
Republic of Congo and Mozambique (Table 1.1.1), as
socio-political uncertainties compounded the adverse
effects of low metals prices. In Mozambique, thediscovery of hitherto undisclosed information on
external debt guarantees of the government led to asignificant deterioration in investor sentiment. By
contrast, growth rebounded in the Ebola-affected
countries—Guinea, Liberia, and Sierra Leone—although
the recovery was constrained by continued weakness inthe price of iron ore, their main export. Per capita GDP
growth was barely positive in metals exporting-countries
in 2016.

Note: This box was prepared by Gerard Kambou and Boaz Nandwa.
Research assistance was provided by Xinghao Gong.

Growth in LIC commodity importers held steady in2016. These agricultural-based and non-intensive
resource economies account for more than two-thirds of
LIC output. Among the large economies (Ethiopia,
Rwanda, Senegal), growth remained at or above 6
percent, supported by infrastructure investment. Growth
was above 5 percent in several other countries, helped bystronger donor aid (Burkina Faso), a gradually
improving security situation (Mali), and increased public
investment (Togo). However, in a number of fragile
countries, growth was feeble (Afghanistan, the Comoros,
Malawi), slowed markedly (Nepal), or negative(Burundi). In Afghanistan, droughts and heightened
insecurity held back activity. Delays in post-earthquake
reconstruction and disruptions in cross-border tradewith India adversely affected growth in Nepal. In Haiti,
political paralysis and limited access to concessional
financing, compounded by heavy flooding anddestruction from hurricane Matthew, weighed heavily
on growth. Per capita output growth was negative
among fragile LICs in 2016.
Easing inflationary pressures. Average inflation in LICs
in 2016 was unchanged from 2015, with a slight decline
in inflation in commodity importers offsetting an
increase in commodity exporters (Figure 1.1.2).
Moderate currency movements and increased
agricultural production helped stabilize prices in somecases. Inflation rose in the metals exporters as a result of
currency depreciations and rising food prices due todrought. Some central banks tightened policy to relieve
currency and inflationary pressures. Meanwhile,
inflation among oil exporters remained low, reflecting
weak domestic demand.
Deteriorating fiscal positions. Overall fiscal balances
deteriorated in LICs in 2016. Fiscal deficits widened
markedly, relative to GDP, in commodity importers

19

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 1.1 Low-income countries: Recent developments and outlook (continued)
FIGURE 1.1.1 Growth and poverty indicators in low-income countries
GDP growth in low-income countries (LICs) slowed to an estimated 4.7 percent in 2016, from 4.8 percent in 2015. GDP
growth was negative in oil exporters, and per capita GDP growth was also negative in the fragile countries, reflecting low
commodity prices, adverse weather conditions, and elevated domestic political uncertainties. LICs’ GDP growth is expected
to recover moderately to 5.6 percent in 2017, and 6.0 percent annually in 2018-19, as commodity prices stabilize, but toremain lower than the average in 2010-14. LICs need to strengthen growth to improve their human development indicators.

A. GDP growth in LICs

B. Per capita GDP growth in LICs

C. GDP growth in fragile LICs

Percent
8

Percent
8

Percent
8

2010-2014 average

6

6

0

2

LICs

Oil-exporting
MetalCommodityLICs
exporting LICs importing LICs

D. Per capita GDP Growth in fragile LICs
Percent
8

LICs

2,000

40
Range
EMDE

2018f

2017f

2016e

2015

2018f

2017f

2016e

2015

2018f

2017f

2016e

2015

2018f

2017f

1,000
2015

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

2018f

2017f

30

0

Commodityimportingfragile

2015

60

100

3,000

Metalexportingfragile2016e

80

Percent of per capita
income, ratio
50
Range
AE
40
EMDEs LIC

4,000

Oil-exportingfragileCommodityimportingfragilePer capita

4

FragileMetalexportingfragileF. Selected education indicators in LICs

Percent of population
120-4

Oil-exportingfragileE. Selected health care indicators in LICs

5,000

2010-2014 average

FragileOil-exporting
MetalCommodityLICs
exporting LICs importing LICs

2018f

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

2018f

2017f

2015

-8

2016e

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

2018f

2017f

2015

2016e

-2

2017f

-2

2015

0

-4

2016e

0

-8

2010-2014 average

4

2

-4

2010-2014 average

4

4

2016e

20

0
HealthImproved
expenditure sanitation
(LHS)
(RHS)

AE
20
LIC
0
Improved
watersource
(RHS)

20
10
0
Government
expenditure

Pupil-teacher ratio

Sources: International Monetary Fund, World Bank.
A. Commodity-exporting LICs include oil and metal exporters, namely, Chad, Guinea, Mozambique, Niger, and Congo, Dem. Rep. Commodity-importing LICs include 22
low-income countries for which data are available. Commodity-importing countries comprise agricultural-based and non-resource intensive economies. Shaded grayareas denote forecast period. C.D. Fragility is measured by the Country Policy and Institutional Assessment (CPIA) ratings published annually by the World Bank. Fragile
countries had average CPIA scores of 3.2 or less in the years 2013-15. They include: Afghanistan, Burundi, Chad, the Comoros, Congo, Dem. Rep., The Gambia,
Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Sierra Leone, South Sudan, and Zimbabwe.
E. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita in purchasing power parity terms, unweighted averagesof 199 EMDEs, 34 AEs, and 29 LIC economies. Access to improved sanitation facilities (in percent of population), unweighted averages for 150 EMDEs, 33 AEs, and 29
LIC economies. Access to improved water sources (in percent of population), unweighted averages for 148 EMDEs, 34 AEs, and 29 LIC economies. Latest available data
is 2011-15.
F. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary student (in percent of per capita income),
unweighted averages of 87 EMDEs, 32 AEs, and 26 LIC economies. Pupil-teacher ratio in primary education (headcount basis), unweighted averages for 165 EMDEs, 31
AEs, and 21 LIC economies. Latest available data is 2011-15.

and commodity exporters (Figure 1.1.2). Fiscal deficits
in metals exporters narrowed slightly, after thesecountries took measures to control expenditures andboost non-resource revenues. By contrast, fiscal deficits
widened in the oil exporters as public spending rose,even as oil revenues remained depressed. In commodity
importers, developments were mixed, although theiraverage fiscal deficit widened. In some countries, deficits
declined (Benin, Haiti), or remained low (Afghanistan,
Nepal) helped by slower growth of public spending; inothers, they remained high (Togo) or widened(Ethiopia, Uganda) as robust growth encouraged higher
expenditures.
Government debt continued to rise in most LICs,
particularly in commodity exporters. The increase was
especially steep in Mozambique, where grossgovernment debt jumped to over 110 percent of GDP
after new information exposed government guarantees
on the debt of state-owned enterprises. Among
commodity importers, government debt rose markedly
in Ethiopia, due to the financing of an ambitious

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

BOX 1.1 Low-income countries: Recent developments and outlook (continued)

infrastructure program. They also widened in somefragile countries (Burundi, The Gambia), reflecting
increased recourse to central bank advances and theissuance of treasury bills to finance persistently highfiscal deficits.
Narrowing current account deficits, declining capital
inflows. External current account deficits narrowed but
remained large among LICs in 2016 (Figure 1.1.2). The
narrowing mainly reflected a reduction of imports bymetals exporters; in contrast, deficits of oil exporters
widened. Among commodity importers, current accountdeficits narrowed only slightly, as strong demand forcapital goods imports largely offset gains from low oil
prices. At the same time, capital inflows fell among
LICs. Foreign direct investment (FDI) inflows
continued to decline, especially among commodityexporting LICs in Sub-Saharan Africa. In Mozambique,for example, inward FDI fell by 17 percent in 2016.
Among commodity importers, inward FDI rose in
Ethiopia, as investors responded to opportunities inconstruction, light manufacturing, and renewableenergy. In contrast to the previous two years, no LIC
tapped the international bond market in 2016, reflecting
weak investor demand. Heightened political uncertainty
reduced private and official bilateral inflows in several
LICs.
Reserve drawdowns and currency depreciations. Large,
albeit reduced, current account deficits, together withlower capital inflows, put pressure on exchange rates andinternational reserves in 2016. LIC currencies generally
depreciated against the U.S. dollar, though by less thanin 2015, except among the commodity exporters (Figure
1.1.2). The Democratic Republic of Congo franc and
the Mozambican metical fell markedly against the U.S.
dollar. The currencies of commodity-importing LICs
(Rwanda, Uganda) depreciated by less, as low oil prices
benefitted current account balances. In some fragile
LICs (Burundi, Haiti), substantial depreciations
reflected political uncertainty and low donor flows.
Currency pressures were met in part with reserve
drawdowns, especially among commodity exporters andsome fragile countries. International reserves, in monthsof imports of goods and services, declined by over 30
percent in Burundi, the Comoros, and Mozambique.
Moderate growth outlook. The outlook is for amoderate recovery in growth across LICs, as they
continue to adjust to low commodity prices. The

external environment confronting LICs is expected to
improve gradually, with commodity prices increasing
modestly but stabilizing at low levels. GDP in LICs is
forecast to expand by 5.6 percent in 2017 and to an
average of 6.0 percent in 2018-19. Growth will be
weaker in oil exporters than in metals exporters, andquite resilient in commodity importers.

•

Growth among oil exporters is forecast to reboundmoderately. GDP in Chad is expected to contract at
a reduced pace in 2017 and expand in 2018, as oil
prices continue to stabilize, the security situation
improves, and new oil fields come on-stream.

•

The outlook for metals exporters is relatively morefavorable. In Mozambique, recent progress indeveloping the nascent energy sector will help boost
investment in gas production. Post-Ebola recovery is
expected to continue in Guinea, Liberia, and Sierra
Leone, with improving commodity prices helping toboost investment and exports.

•

Growth in most commodity importers is expected
to remain strong, supported by large public
investment and low oil prices. However, fragile
countries will see a less vigorous recovery over theforecast horizon (Afghanistan, Burundi, theComoros, Haiti), as political uncertainty andsecurity challenges continue to hinder private
investment.

Risks tilted to the downside. External and domesticrisks to the growth projection vary across countries but
are generally tilted to the downside.
•

External risks. Rebalancing in China could lead toweaker-than-expected recoveries in growthincommodity-exporting LICs, through lower
commodity prices and reduced FDI. Weaker-thanexpected growth in advanced economies would have
similar effects on commodity exports andremittances (Figure 1.1.3).

•

Domestic risks. Activity could be adversely affectedby persistent drought (Afghanistan, Ethiopia,
Malawi, Zimbabwe), rising geopolitical tensions(Afghanistan), heightened political uncertainty(Ethiopia, Haiti, the Democratic Republic ofCongo, Zimbabwe), and worsening security(Afghanistan, Mali) (Figure 1.1.3).

21

22

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 1.1 Low-income countries: Recent developments and outlook (continued)
FIGURE 1.1.2 Macroeconomic and financial developments in low-income countries
In 2016, inflation slowed in commodity importers but rose sharply in commodity exporters, particularly in metal exporters,
driven by currency depreciations and rising food prices caused by drought. Fiscal deficits widened, with deficits rising more
sharply in commodity importers. As a result, public debt continued to grow. External current account deficits fell across LICs
as a whole in 2016 but remained high. Commodity exporters—in particular, metals exporters—account for most of the
improvement. Current account deficits fell only slightly in commodity importers. LIC currencies continued to depreciate
against the U.S. dollar in 2016, but by less than in 2015. Depreciations accelerated significantly, however, among thecommodity exporters, reflecting pressure from falling export receipts. Market pressures on exchange rates were partly
absorbed by reserve drawdowns, especially in commodity exporters and some fragile LICs.
A. Inflation
Percent, year-on-year
Dec-15 Latest
8

B. Fiscal balance

2010-14 average

Percent of GDP
0

C. Public debt
2015

2016e

2015

2016e

50

-2

4

2010-1460-1

6Percent of GDP
70

40
30

-3

20

2
-4

10

0
Fragilecountries

0-5
CommodityCommodityexporting LICs importing LICs

LICsCommodity- Commodityexporting LICs importing LICs

F. Reserves in selected LICs

Percent of GDP
0

Percent, year-on-year0Months of imports
7
2015
6
5
4
3
2
1
0

-15
-30

2015
2016e

Dec-15
Latest

-20

-40

-25
Commodity- Commodityexporting
importing
LICs
LICs

LICs

Fragilecountries

Commodity- Commodityexporting
importing
LICs
LICs

LICs

Fragilecountries

Burundi-10-20

Latest

Mali

-5

-10

Madagascar

E. Exchange rate depreciation

Congo, Dem.
Rep.

D. Current account balance

LICs

Comoros

LICs

Haiti

Commodity- Commodityexporting importing
LICs
LICs

Sources: International Monetary Fund, World Bank.
A. The last observation is October, 2016.
E. The last observation is November 2016.
F. The last observation is October, 2016.

Dual policy challenge. Low commodity prices haveresulted in a slowdown in GDP growth in commodityexporting LICs, threatening their recent progress in
reducing poverty. Per capita output growth has also
continued to lag notably among fragile countries.
Commodity-importing LICs, benefitting from low raw
materials prices, have experienced more solid growth,
but they also suffer from some notable macroeconomic
imbalances. Thus, LICs in general face the challenge ofboosting per capita output growth, while ensuring
macroeconomic stability.
•

Growth challenges. About two-thirds of the poor in
Sub-Saharan Africa’s LICs live in rural households,

for which agriculture is the dominant source ofincome and food security (World Bank 2016e).
Increasing the growth of agricultural output andproductivity is therefore central to boosting incomesin these countries. This requires significant public
investment in rural public goods to strengthenmarkets and promote
the adoption of newtechnologies. LIC governments will needinternational support to finance these types ofinvestments. Multilateral development banks canplay an important role by expanding access toconcessional financial flows. Fragile countries needto achieve a degree of political stability in order tobegin to generate steady growth.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

BOX 1.1 Low-income countries: Recent developments and outlook (continued)
FIGURE 1.1.3 Vulnerabilities and policy uncertainty in low-income countries
LICs have become increasingly integrated into global trade flows. While trade has supported growth in these economies, it
has also exposed them to external shocks. While remittances from advanced economies have been stable in recent years,
those from other countries, including the Gulf Cooperation Council (GCC) economies, have declined. Several fragile LICs
have regressed on the policy perception index in recent years because of policy uncertainty.
B. Remittances
Percent of GDP
12 Others GCC

LIC

Advanced economies

10

20

0

2
0
United China EuroStatesArea

LICs Others World

0
2010

2015

SSA LICs

20

4

Zimbabwe

40

6

Niger

40

60

8

Guinea60

Policy Perception Index (100=best)100
2011/2012
2015
80

Congo, Dem. Rep.

2011-15

Madagascar

2000-08

Mali

Percent of GDP
80

C. Policy perception index

Burkina Faso

A. Exports

Sources: Fraser Institute Annual Survey of Mining Companies (2015), International Monetary Fund, Organisation for Economic Cooperation and Development, WorldBank.
B. GCC is the Gulf Cooperation Council. GCC countries are: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
C. Policy Perception Index, previously known as the Policy Potential Index, is a composite index, ranging from 1 (worst) to 100 (best), that measures the effects ofgovernment policies. Its calculation includes uncertainty concerning the administration, interpretation, and enforcement of existing regulations, environmental regulations,
regulatory duplication and inconsistencies, taxation, disputed land claims and protected areas, infrastructure, socioeconomic agreements, political stability, labor issues,geological database, and security (Fraser Institute 2016).

•

Common to all LICs is the need for governments to
put in place a positive business environment. While
progress has been made across LICs to improve thequality of regulation, more needs to be done. Policy
uncertainty should be reduced. Power and tradelogistics infrastructure needs to be upgraded (WorldBank 2013). Reforms in education and job training
would strengthen the skills base. A strong businessenvironment will also help promote economic
diversification, which would reduce dependence on
raw material exports and help sustain long-term
growth.

•

FDI can help the development of manufacturing
and agro-businesses by introducing capital and skills
that can be integrated into global value chains(GVC). Cambodia, which graduated from LIC
status in 2016, effectively leveraged its comparativeadvantage in garments production to deepen
integration into GVCs. This helped diversify its
exports and boost output (IMF 2015b).

•

Macroeconomic stability: With commodity prices
remaining low and capital flows declining,
adjustments are needed across LICs to contain fiscal
deficits. These includes stronger efforts to improvetax collection, which is held back by limited data on
potential taxpayers, limitations of tracking tools,
gaps in capabilities and resources, and complex tax
procedures. Appropriate measures to improve tax
collection will vary across countries, depending on
their tax systems. For most LICs, standardizing andsimplifying internal processes, closing major tax
loopholes, and improving collection procedures
would help boost revenues (McKinsey Global
Institute 2016).
•

Fiscal adjustment also calls for more efficient
government and the reduction of unproductive
expenditures. This implies rationalizing current
expenditures and increasing the efficiency of public
investment
through
improvedfinancialmanagement (Dabla-Norris et al. 2012). Within acredible medium-term fiscal plan, it is vital tomaintain, or increase, public investment ineducation and health to build human capital, and in
strategic infrastructure to remove transportation
bottlenecks and systemic power shortages.
Concessional financing can help create space tofund these investments and catalyze additional
private sector financing.

23

24

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 1.1 Low-income countries: Recent developments and outlook (continued)

TABLE 1.1.1 Low-income country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

Low Income Country, GDPb
Afghanistan
Benin
Burkina Faso
BurundiChadComoros
Congo, Dem. Rep.
Ethiopiac
Gambia, The
GuineaGuinea-Bissau
HaiticLiberia
Madagascar
Malawi
Mali
Mozambique
NepalcNiger
RwandaSenegalSierra Leone
Tanzania
Togo
Ugandac
Zimbabwe

2018

2019

2015

2016

2017

2018

Percentage point differences from
June 2016 projections

Projections

6.2
1.3
6.5
4.0
4.7
6.9
2.1
9.5
10.3
0.9
1.1
2.5
2.8
0.7
3.3
5.7
7.0
7.4
6.0
6.9
7.0
4.3
4.6
7.0
5.9
4.8

4.8
0.8
5.0
4.0
-3.9
1.8
1.0
6.9
9.6
4.7
0.1
4.9
1.2
0.0
3.1
2.8
6.0
6.6
2.7
3.5
6.9
6.5
-21.1
7.0
5.5
5.0

4.7
1.2
4.6
5.2
-0.5
-3.5
2.0
2.7
8.4
0.5
5.2
4.9
1.2
2.5
4.1
2.5
5.6
3.6
0.6
5.0
6.0
6.6
3.9
6.9
5.4
4.6

5.6
1.8
5.2
5.5
2.5
-0.3
2.5
4.7
8.9
0.8
4.6
5.1
-0.6
5.8
4.5
4.2
5.1
5.2
5.0
5.3
6.0
6.8
6.9
7.1
5.0
5.6

6.0
3.0
5.3
6.0
3.5
4.7
3.0
5.0
8.6
2.6
4.6
5.1
1.5
5.3
4.8
4.5
5.0
6.9
4.8
6.0
7.0
7.0
5.9
7.1
5.5
6.0

6.1
3.6
5.3
6.0
3.5
6.3
3.0
5.0
8.6
2.6
4.6
5.1
2.0
5.3
4.8
4.5
5.0
6.9
4.8
6.0
7.0
7.0
5.9
7.1
5.5
6.0

0.0
-0.7
-0.2
0.0
-1.4
0.0
-1.3
-0.8
0.0
7.2
0.0
-0.2
0.0
-0.3
0.1
0.0
0.5
0.3
0.0
-0.7
-0.2
0.0
0.4
0.0
0.0
0.0

-0.6
-0.7
-0.9
0.0
-3.5
-3.1
-0.4
-3.6
1.3
4.5
1.2
-0.8
0.3
-1.3
0.4
-0.5
0.3
-2.2
0.0
-0.4
-0.8
0.0
-2.6
-0.3
-0.2
-0.4

-0.7
-1.1
-0.6
0.0
-1.0
-1.9
-0.5
-3.0
-0.5
-3.7
-0.4
-0.9
-2.5
0.5
0.8
0.1
0.0
-2.5
0.3
-1.0
-1.2
0.0
1.6
0.0
0.0
-0.3

-0.6
-0.6
-0.8
0.0
-0.5
-0.5
-0.1
-3.5
0.0
-2.9
-1.4
-0.9
-0.7
-0.3
1.1
-0.9
0.0
-1.4
0.4
-1.0
-0.1
0.0
0.5
0.0
0.0
-0.8

3.8

1.1

0.4

3.8

3.4

3.4

0.0

-1.0

-1.8

-0.1

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ fromthose contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. Central African Rep., Democratic People's Republic of Korea, and Somalia are not forecast due to data limitations.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. GDP growth based on fiscal year data.

above its long-term average of 4 percent. This
slowdown partly reflects a downgrade to India’s
fast pace of expansion.

accelerated implementation of public investment
projects (the Philippines), and large cross-borderinfrastructure investments (Bangladesh, Pakistan).

Commodity importers continued to benefit frompast terms-of-trade improvements and generallysound macroeconomic policies. Low inflation andlow energy costs enabled many commodity
importers to ease or to maintain accommodative
macroeconomic policies (Croatia, Thailand,
Tunisia, the Philippines). In some countries,
growth has benefitted from idiosyncratic factors,
such as improved confidence (Thailand), theDomestic demand in commodity importers hasremained robust, supported by low commodity
prices and accommodative monetary and fiscal
policy. Private consumption was strong in many
commodity importers, especially in Eastern
Europe and South Asia. Investment growth has
recovered in a number of countries, particularly in
Eastern Europe (Croatia, Romania, Serbia), East
Asia and Pacific (Cambodia, the Philippines), andGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.13 EMDE prospects
EMDE growth is projected to recover to 4.2 percent in 2017 and about 4.7
percent in 2018-19. This reflects a recovery in commodity exporters
towards their long-term average growth. Growth in commodity importers is
projected to remain at around 5.7 percent on average, slightly below its
long-term average rate. A number of mostly structural factors are expected
to weigh on the medium- and long-term EMDE growth outlook, as reflected
in deteriorating potential growth estimates and downward revisions to longterm investment prospects.
A. GDP growth

B. GDP growth
1990-2008 average
2003-2008 average

Percent
10
8

8

6

6

4

3Chapter 2 discusses the short-term impact of this action on
India’s growth.
4For the current fiscal year, the World Bank Group defines lowincome economies as those with an annual GNI per capita, calculatedusing the World Bank Atlas method, of $1,025 or less in 2015.

EMDE com. exp. EMDE com. imp.
ex. BRICS
ex. BRICS

2014
2015
2016
2017
2018
2019

2014
2015
2016
2017
2018
2019
EMDE
commodity
exporters

2014
2015
2016
2017
2018
2019

2014
2015
2016
2017
2018
2019
EMDE commodity
importers

2014
2015
2016
2017
2018
2019

2014
2015
2016
2017
2018
2019
EMDEs

0

BRICS

C. EMDE actual and potential growth

D. Five-year ahead investment growthforecasts

Percent

Percent
8

8
7
6
5
4
3
2
1
0

Actual growth
Potential growth642

Sources: Consensus Economics, Didier et al. (2015), World Bank.
A. B. Shaded area indicates forecasts.
C. Unweighted average of major EMDEs. Potential growth defined as in Didier et al. (2015).
D. Each column shows five-year ahead Consensus Forecasts as of the latest available monthin the year denoted. Unweighted averages of 21 EMDEs. Last observation is October 2016.

ing in a sharp reduction in FDI flows. Elsewhere,
political tensions (Burundi, The Gambia, theDemocratic Republic of Congo, Haiti, Nepal),and security challenges (Afghanistan, Chad,
Niger) continued to cause strains on economic
activity. However, growth in many commodity
importers (Ethiopia, Rwanda, Senegal, Tanzania)
remained solid in 2016, supported by strong infrastructure investment.

Outlook
Growth in EMDEs is projected to pick up to 4.2
percent in 2017 and about 4.7 percent on averagein 2018-19 (Figure 1.13). This acceleration
mainly reflects a recovery in commodity-exporting

2016

0

2014

Within the broader group of EMDEs, growth in
low-income countries (LICs) is estimated at 4.7
percent in 2016 (Box 1.1).4 Activity contracted inoil exporters (Chad, South Sudan), and decelerated in a number of metal exporters (the Democratic Republic of Congo, Mozambique, Zimbabwe)as they continued to struggle to adjust to low commodity prices. The post-Ebola recovery in Guinea,
Liberia, and Sierra Leone was held back by the decline in the price of iron ore, their main export.
Compounding the effect of depressed commodity
prices, a number of LICs were subject to negative
domestic shocks. El Niño-related drought affected
agricultural production in Chad, Ethiopia,
Malawi, Mozambique, Rwanda, and Uganda. The
release of previously undisclosed information on
external debt guarantees of the government inMozambique weakened investor sentiment, result-

2

2012

Low-income countries01990-2008 average
2003-2008 average

4

2

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

Weaker demand growth from major markets
depressed export growth in many commodity
importers. Exceptions were Germany’s trading
partners, which benefited from that country’s solid
performance (Hungary, the former Yugoslav
Republic of Macedonia, Poland, Romania); Asian
economies with improving competitiveness(Cambodia, India); and economies with robust
services exports (Croatia, India, Lebanon, thePhilippines, Sri Lanka, Thailand).

Percent
10

2010

South Asia (Pakistan). However, investment
growth remains below its long-term average inmore than half of all commodity-importing
countries. More generally, slower growth in somecommodity importers is explained by idiosyncratic
factors, such as policy uncertainty, spillovers fromlarge trading partners (Belarus, Mexico), andlegacies from natural disasters (Fiji, Haiti, Nepal).
In India, the immediate withdrawal of a large
volume of currency in circulation and subsequent
replacement with new notes announced by thegovernment in November contributed to slowing
growth in 2016.3

25

CHAPTER 1

26

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 1.2 Regional perspectives: Recent developments and outlook
EMDE regions with substantial numbers of commodity-importing economies—East Asia and the Pacific, and South Asia—are
projected to experience solid growth. In contrast, the outlook for EMDE regions with large numbers of commodity exporters ismixed. Growth in Latin America and the Caribbean, and in Europe and Central Asia, is expected to accelerate in 2017, mainlyreflecting a bottoming out in activity in Brazil and Russia. Growth in the Middle East and North Africa will pick up modestly,as oil prices recover. While growth should also rebound in Sub-Saharan Africa, the improvement is notably weaker than previously expected, as some commodity exporters struggle to adjust to low commodity prices.
East Asia and Pacific. Regional growth is estimated to havereached 6.3 percent in 2016, slightly below the 6.5 percent
registered in 2015, and in line with June projections(Figure 1.2.1). Solid domestic demand, supported bygenerally benign financing conditions for most of the year,
was accompanied by soft export growth. The growthcontour continued to follow China’s gradually declining
path. Excluding China, regional output is estimated tohave expanded 4.8 percent in 2016, the same pace as in2015. A pickup in growth in commodity importers in theregion offset weaker growth in some commodity exporters,
which continue to adjust to low prices. Regional growth isprojected to moderate to 6.1 percent on average in 201719, in line with June forecasts. Further moderation in
Chinese growth will be partly offset by acceleration in therest of the region, reflecting recovery in commodity
exporters and continued solid performance in commodity
importers. Key risks to the region include financial market
volatility related to heightened policy uncertainty andgrowth disappointments in major economies, as well as
rising protectionist sentiments.
Europe and Central Asia. Regional GDP is estimated tohave expanded at a 1.2 percent pace in 2016, reflecting aneasing recession in Russia, stabilization of commodity
prices, and reduced geopolitical tensions in Ukraine. The
2016 estimate is broadly in line with June projections, as
an upward revision for Russia was offset by weakness insome other commodity exporters and Turkey. Growth in
the western part of the region remained generally solid,
reflecting robust consumption and net export growth. In
contrast, growth slowed in the eastern part, excluding
Russia, due to deceleration in energy-exporting countries.
Looking ahead, regional growth is projected to pick up to
2.4 percent in 2017 and an average of 2.9 percent in 201819, as Russia bounces back and other commodity exporters
and Turkey recover. The main downside risks to theoutlook include renewed declines in commodity prices,
disruptions in financial markets amid tightening financing
conditions, a sharper-than-expected slowdown in EuroArea growth, and elevated political uncertainty.
Note: This box was prepared by Derek Chen, Gerard Kambou, Boaz
Nandwa, Yoki Okawa, Ekaterine Vashakmadze, and Dana Vorisek.

Latin America and the Caribbean. Regional output isestimated to have contracted 1.4 percent in 2016—thesecond consecutive year of negative growth—against the
backdrop of low commodity prices, macroeconomic
imbalances, and other domestic challenges. In SouthAmerica, GDP contracted 2.8 percent, with a further
decline in Brazil and recession in Argentina. Aggregate
output in Mexico and Central America expanded 2.3
percent, while that of Caribbean grew 3.2 percent. Relativeto June projections, regional growth in 2016 was slightly
downgraded, as an upward revision for Brazil, partly
reflecting improved confidence in the new government,
was offset by downward revisions to growth in several
other commodity exporters and Mexico. Regional growthis projected to recover to 1.2 percent in 2017, and tofurther strengthen to an average of 2.4 percent in 2018-19,
as domestic headwinds in Brazil and other economies abate
and fiscal consolidation across the region is completed.
The main downside risks to the outlook include rising
policy uncertainty in advanced-economy trading partners,
particularly the United States; a renewed slide incommodity prices; and more protracted contractions
among the region’s largest economies.
Middle East and North Africa. After reaching 3.2 percent
in 2015, growth in the region is estimated to have fallen to
2.7 percent in 2016, slightly below June projections, andreflecting downward revisions in oil exporters, particularly
some Gulf Cooperation Council (GCC) countries, as
weakness spread from the oil to the non-oil sector.
Regional growth is projected to accelerate following thebottoming out of oil prices in 2016, reaching 3.1 percent
in 2017 and 3.3 percent in 2018–19. For oil exporters,
despite a continued robust expansion in the Islamic
Republic of Iran, growth will be somewhat slower thanJune projections, due to fiscal consolidation plans in Saudi
Arabia, and oil production capacity constraints in Iraq. For
oil importers, rising growth mainly reflects an agricultural
sector recovery in Morocco and improving activity in
Egypt after severe foreign exchange shortages in fiscal year
2016. However, recovery in Egypt is highly dependent on
the pace of fiscal consolidation and adjustment to therecent floating of the currency. The main downside risks to
the regional outlook continue to be a weaker-than-GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

BOX 1.2 Regional perspectives: Recent developments and outlook (continued)

A. Regional growth (weighted average)
Percent

GEP June 2016

1990-08 average

2003-08 average

10
8
6
4
2
0

2015
2016
2017
2018

2015
2016
2017
2018

2015
2016
2017
2018

2015
2016
2017
2018

2015
2016
2017
2018

-2

East Europe and
Latin
Middle South Asia
SubAsia and Central
America East and
Saharan
Pacific
Asia
and theNorth
AfricaCaribbean Africa

B. Regional growth (unweighted average)
Percent

GEP June 2016

1990-08 average

2003-08 average

10
8
6
4
2

2015
2016
2017
2018

2015
2016
2017
2018

EuropeandCentral
Asia

2015
2016
2017
2018

East
Asia and
Pacific

2015
2016
2017
2018

0

2015
2016
2017
2018

Sub-Saharan Africa. Regional growth is estimated to havedecelerated from 3.1 percent in 2015 to 1.5 percent in
2016, the lowest level in over two decades, and almost one
percentage point below June projections. As a result,regional per capita GDP is estimated to have contracted
1.1 percent in 2016, following an expansion of 0.4 percent
in 2015. Commodity exporters continued to struggle toadjust to low prices, which is threatening recent progresson poverty and social indicators. The deterioration ineconomic activity in commodity exporters in 2016—
particularly in South Africa and in oil exporters, which
together account for two-thirds of regional output—was
only partially offset by solid growth in most commodity
importers. While the forecast for regional growth has been
downgraded, a rebound is still expected—to 2.9 percent in2017, and to 3.7 percent in 2018-19—as commodity
prices stabilize and the adjustment to earlier negative terms-of-trade shocks continues. Downside risks include aslower pace of adjustment to persistently low commodity
prices, a further decline in these prices, and an additionaltightening of global financial conditions.

EMDE regions with substantial numbers of commodityimporting economies are projected to experience solid
growth, in line with previous forecasts. In contrast, theoutlook for EMDE regions with large numbers ofcommodity exporters is mixed.

2015
2016
2017
2018

South Asia. Regional output is estimated to have expanded
by 6.8 percent in 2016, a bit below June projections,buoyed by strength in domestic demand. Indian growth isestimated to have decelerated to a still robust 7 percent,with continued tailwinds from low oil prices and solid
agricultural output partly offset by challenges associatedwith the withdrawal of a large volume of currency incirculation and subsequent replacement with new notes.
Excluding India, regional growth reached 5.3 percent in
2016, with notable heterogeneity among countries.
Looking forward, regional growth is projected to edge up
to 7.1 percent in 2017 and pick up to an average of 7.4
percent in 2018-19, supported by ongoing dividends frompolicy reforms and solid domestic demand amid afavorable macroeconomic environment. Downside risks to
the outlook include reform setbacks, worsened politicaltensions, a further unexpected tightening of financing
conditions, a slowdown in remittances inflows, and bankasset quality problems.

FIGURE 1.2.1 Regional growth

2015
2016
2017
2018

expected rise in oil prices, as well as spillovers from thesevere conflicts in several countries.

Latin
Middle South Asia
SubAmerica East and
Saharanand theNorth
AfricaCaribbean Africa

Source: World Bank.
A.B. Average for 1990-08 is constructed depending on data availability. For
ECA, data for 1995-2008 are used to exclude the immediate aftermath of theSoviet Union collapse.
A. Since the largest economies of each region account for almost 50 percent ofregional GDP in some regions, the weighted average predominantly reflects
the development in the largest economies in each region.
B. Unweighted average regional growth to ensure broad reflection of regional
trends across all countries in the region.

27

28

CHAPTER 1

EMDEs, where growth is projected to increase to
2.3 percent in 2017 and to an average of 3.1
percent in 2018-19—slightly above its long-term
average of 2.8 percent, but substantially lower
than the average of 5.9 percent achieved during
the commodity price boom years of 2003-2008.
In commodity-exporting EMDEs, a faster-thanexpected recovery in some large countries (Brazil,
Russia) and the modest rise in commodity prices
will be offset by negative domestic factors in a
number of countries still struggling to adjust to
low commodity prices (Angola, Nigeria).
Growth in commodity-importing EMDEs is
projected to remain stable throughout the forecasthorizon, at around 5.7 percent on average, andslightly below its long-term average rate. The
gradual slowdown in China is projected to beoffset by a moderate acceleration in the rest of thegroup, including a robust expansion in India. As aresult, divergences between exporters andimporters are expected to narrow.
The external environment confronting LICs is
expected to improve only gradually, with
commodity prices stabilizing, but staying low, andglobal growth picking up only moderately. Thisis expected to provide some support to growth incommodity-exporting LICs. The majority ofcommodity-importing LICs will continue tobenefit from low oil prices. Against this backdrop,
growth in LICs is forecast to rebound to
5.6 percent in 2017, a moderate recovery byrecent standards, before picking up to 6.1 percent
by 2019.
Considerable differences will persist across LICs.
Growth among oil exporters will remain weak in2017. Other commodity exporters will continue
to struggle to adjust to low commodity prices,with activity expanding at a moderate pace, suchas Mozambique, the Democratic Republic ofCongo, and Zimbabwe. Security issues, andpolitical uncertainties will hold back activity in
Afghanistan, Burundi, The Gambia, and Mali.
However, growth is expected to strengthen in
Nepal as political tensions ease and reconstructionof infrastructure picks up. Large infrastructure
investment and low oil prices are expected tocontinue to support robust growth in Ethiopia,
Rwanda, Senegal, and Tanzania.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

More generally, a number of mostly structural
factors are expected to weigh on the medium- andlong-term EMDE growth outlook. External
factors include structural weakness in advancedeconomy growth, heightened uncertainty about
the direction of policies in key advanced
economies, subdued global trade, persistently low
commodity prices, and rebalancing in China.
Domestic factors include unfinished adjustments
in some commodity exporters to low commodity
prices and slowing productivity growth. In
general, potential growth has slowed in EMDEs
since the global financial crisis, reflecting
worsening demographics, lack of productive
investment, depressed productivity growth, andweak investment growth. The deterioration in
potential growth has, in turn, contributed to
weaker investment prospects over the medium
term. Total factor productivity growth has
decelerated in EMDEs, particularly in commodity
exporters and in EMDEs with the slowest
investment growth (Chapter 3).

Risks to the outlook
Uncertainty surrounding global growth projections
has increased and risks continue to be tilted to thedownside. This reflects the possibility of a prolonged
period of heightened policy uncertainty following
recent electoral outcomes in key major economies,
mounting protectionist tendencies, and potential
financial market disruptions associated with sharpchanges in borrowing costs or exchange rate
movements. Weakening potential growth could
further erode EMDEs’ ability to absorb negative
shocks. However, significant fiscal stimulus in major
economies—in particular, the United States—could
support a more rapid recovery in global activity inthe near term than currently projected, and thus
represents a substantial upside risk to the outlook.
Baseline forecasts envisage that global growth will
pick up from 2.3 percent in 2016 to 2.7 percent
in 2017, reaching 2.9 percent by the end of theforecast horizon. While these projections represent
the latest of a series of downgrades over recent
forecast exercises, revisions are less pronounced
than in the past (Figure 1.14).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Global growth projections continued to be downgraded, albeit less than inprevious forecast rounds. Forecast uncertainty and downside risks toglobal growth have increased, reflecting in part heightened global policy
uncertainty. The probability that global growth could be more than 1
percentage point below baseline projections in 2017 is estimated to be 17
percent. In contrast, the probability of global growth being 1 percentage
point above the baseline projection is estimated at 9 percent.
A. Global growth forecasts over time

B. EMDE growth forecasts over time

Percent

Percent
5

June 2015
January 2016
June 2016
January 2017

4

3

3

C. Standard deviation of global
growth forecasts

D. Skewness of global growthforecasts

Percent
1.20

Percent
12-month ahead

0.0Median12-month ahead

2018

2017

2013

2016

2

2018

2017

2016

2015

2014

2013

2

June 2015
January 2016
June 2016
January 2017

2015

4

2014

5

Median

1.15
-0.2

1.10
1.05

-0.4

1.00

5

Percent
25

4

4

20

3

3

15

2

2

10

1

1

2017

2016

2015

F. Probability of 1 percentage-pointchange in global growth forecasts

Percent
550 percent
80 percent
90 percent
Baseline
0
2015
2016

2014

2012

E. Risks to global growth projections

2013

-0.6

2016

2015

2014

0.95

2013

The main downside risks to the global outlook
include prolonged periods of heightened policy
uncertainty in major advanced economies andsome EMDEs, as well as financial market
disruptions amid tighter global financing
conditions and renewed U.S. dollar appreciation.
A number of events could trigger the realization ofthese downside risks. These include electoral
outcomes in some large economies that further
contribute to policy uncertainty, as well asmonetary policy actions by major central banks
that result in sharp swings in EMDE borrowing
costs. Political and policy uncertainty could
increase in a climate of mounting protectionist
tendencies, which could undermine the expected
recovery in global trade and investment. Global
financial market volatility could be particularly
disruptive in EMDEs with limited policy spaceand elevated vulnerabilities. Slower potential
growth could further erode the ability of EMDEs
to absorb negative shocks, including thoseemanating from lower-than-expected growth inmajor economies. However, well-targeted fiscalloosening and other growth-enhancing policies inmajor economies—particularly in the UnitedStates—could lead to stronger growth and a morebalanced policy mix than currently assumed andthus represent a substantial upside risk to theforecast.

FIGURE 1.14 Risks to global growth

2012

There is, however, substantial uncertainty aroundthese forecasts, which has been heightened byrecent political developments—in particular,
electoral outcomes in the United States and theUnited Kingdom. Uncertainty around global
growth projections for 2017 has increased, and thebalance of risks remains tilted to the downside,amid unclear prospects for policy direction in
major economies. At present, the 90 percent
confidence interval around global growth forecasts
for 2017 lies between 1.1 percent and 4 percent.
The 50 percent confidence interval ranges from 2
percent to 3.2 percent. While the probability that
global growth could be more than 1 percentage
point below baseline projections in 2017 iscurrently estimated at about 17 percent, theprobability of global growth being 1 percentage
point above the baseline projection is estimated at
9 percent.

29

CHAPTER 10
2018

1 percentage point below baseline
1 percentage point above baseline

5
0
2017

2018

Sources: Bloomberg, World Bank.
A.B. The dates indicate the editions of Global Economic Prospects.
C.D. Vertical lines denote the cut-off date of the June 2016 Global Economic Prospects (May 31,2016). The time-varying standard deviation and skewness of global growth forecasts are computed
as the weighted average of the standard deviation and skewness of the forecast distribution of three
underlying risk factors (oil price futures, the S&P 500 equity price futures and term spread forecasts).
Each of the three risk factor’s weight is estimated using the variance decomposition of global growthforecasts derived from the vector autoregression model described in Ohnsorge, Stocker, and Some(2016). The median standard deviation and skewness is computed over the period 2006-16. 3-monthmoving average. Last observation for market data is December 19, 2016.
E. F. The fan chart and corresponding probabilities are constructed based on the recovered standard
deviation and skewness, assuming a two-piece normal distribution.

30

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.15 Risks - Policy uncertainty andprotectionism

Heightened policy uncertainty amid
mounting protectionist pressures

Political and policy uncertainty increased against the backdrop of national
elections and referendums and an intensifying debate about income
inequality and the benefits of trade liberalization in advanced economies.
Rising uncertainty about U.S. policies could trigger financial market
volatility and, if sustained, dampen EMDE investment. The number of
temporary trade barrier measures continued to increase. Tariffs could beraised significantly in a scenario of retaliatory trade restrictions.

Policy uncertainty has increased notably, amid
elections or referendums in countries accounting
for close to 50 percent of global GDP in 2016 andmore than 25 percent of GDP in 2017 (Figure1.15). In advanced economies, the outcome of the
Brexit vote in the United Kingdom and of theelections in the United States has led toheightened uncertainty about future policy
direction, particularly regarding trade, which
could continue to intensify in 2017. Rising
within-country income inequality during theperiod of rapid globalization, as well as stagnant
real median wages, has fueled an intense debate
about the benefits of trade liberalization andimmigration in advanced economies (Lakner and
Milanovic 2016; Niño-Zarazúa, Roope, and Tarp
2016; Milanovic 2016). Upcoming elections,particularly in Europe, could trigger a further shift
toward protectionist and populist policies against
the backdrop of sluggish growth, and, in Europe,sizable refugee inflows.

A. Size of economies with national
elections

B. Economic Policy Uncertainty

Percent of world GDP
Advanced economies
50
EMDEs

Index, Jan. 2014 = 100
350
China
EuropeBrazilRussia
300

40

UK
US

250
30
200
20

150

10

100
50

0
2016

2017

2014

2018

2015

2016

C. Impact of 10-percent rise in VIX on
EMDE investment

D. Impact of 10-percent rise in U.S.
EPU on EMDE investment

Percentage points

Percentage points

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0

-2.0
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678E. Temporary trade measures

F. Tariff rates across WTO members

Percent of non-oil import products
3

Percent
40

AppliedDistance to bound

30
20

2

10

1990

2000

2010

2014

2015

Advanced economies

Agricultural

Industrial

Industrial

0

Agricultural

0
1

EMDEs

Sources: Bloomberg, Economic Policy Uncertainty, Haver Analytics, WITS-TRAINS dataset, World
Bank, World Trade Organization.
A. Sample includes 36 advanced economies and 62 EMDEs. Results are GDP-weighted.
B. Policy uncertainty as measured in Baker, Bloom, and Davis (2015). Based on the frequency ofarticles in domestic newspapers mentioning economic policy uncertainty. 6-month moving average.
Last observation is November 2016.
C.D. Vector autoregressions include, in this order, the VIX or the U.S. Economic Policy Uncertainty(EPU) index, MSCI Emerging Markets Index, J.P.Morgan Emerging Markets Bond Index, aggregate
GDP and investment growth in 18 EMDEs, with G7 GDP growth, U.S. 10-year bond yields, and MSCIWorld Index as exogenous regressors and estimated with two lags. Solid lines indicate the median
responses and dotted lines indicate 16-84 percent confidence intervals. Models estimated over theperiod 1998Q1-2016Q2.
E. Share of non-oil import products at the HS-06 level. Temporary trade barriers include a nonredundant accounting of antidumping, countervailing duties, global safeguards, and China-specifictransitional safeguards.
F. Applied tariffs are actual tariffs; bound tariffs are maximum tariffs under WTO rules. Product level
data was aggregated using trade weights for 2014.

Policy uncertainty, including around elections,tends to raise risk premiums, depress investment,
and reduce incentives for market entry andtechnological upgrading (Baker, Bloom, and Davis
2013; Kelly, Pastor, and Veronesi 2014; Handley
2014; Handley and Limao 2015). When facedwith high uncertainty, households also tend to
reduce durable goods consumption and increaseprecautionary savings. These dampening effects on
growth can be amplified by financial market
disruptions, as credit conditions tighten. Large
increases in policy uncertainty are associated withpersistently slower growth (Kose and Terrones2015). Heightened uncertainty about trade policy
in major economies could erode already feeble
international trade conditions. The current
unusually high levels of uncertainty could
continue to weigh on a fragile global economy.
Policy uncertainty in the United States. The
initial financial market reaction to the U.S.
elections was orderly. However, there is increased
uncertainty around the future direction of fiscal,
trade, immigration, and foreign policies in the
United States. While some of the proposals

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

suggested by the new administration (e.g., fiscal
stimulus and infrastructure spending) could havepositive growth effects, others (e.g., tariffincreases) could have a dampening impact. Moregenerally, the United States plays a major role in
the global economy (Special Focus); accordingly, asustained increase in policy uncertainty in the
United States could have negative repercussions
for both the domestic and global economic
outlooks. According to model estimates, a modest
1 standard-deviation shock to the U.S. index of
economic policy uncertainty could reduce U.S.
GDP and investment growth by 0.4 and 0.8
percentage points, respectively, within two years.
Uncertainty in the United States could also weighon investment in other countries, particularly
EMDEs. A 10-percent increase in the implied
volatility of the U.S. stock market (VIX) would
reduce EMDE GDP growth by about 0.2
percentage point and EMDE investment growthby about 0.5 percentage point after one year.
Policy uncertainty in Europe. The Brexit vote had
limited short-term cross-border financial market
spillovers, partly reflecting the commitment for
further policy accommodation by major central
banks. However, it will take time to resolve theuncertainty surrounding the future relationshipbetween the United Kingdom and the EU, given
the protracted nature of the negotiations forinternational trade agreements, and the unusualcomplexity of the issues in this case. This, in itself,
could set back longer-term growth prospects acrossthe EU. The magnitude of adverse long-run effects
will depend on the type of relationship that theUnited Kingdom will negotiate with the EU, as
well as associated political and institutional risks.5
Policy uncertainty in Europe has considerable
adverse implications for investment growth in
EMDEs, particularly in the Eastern Europe andCentral Asia (ECA) region, for which Europe is an
important export market and source of finance. A
1 standard-deviation economic policy shock in
Europe could reduce investment growth by 1.5
5Economic analysis conducted by a number of policy institutions
prior to the referendum suggests a wide range of possible outcomes,
with the long-run impact on the U.K. GDP level estimated to be
between -1 and -8 percent, depending on market access to the rest of
the EU under the new arrangements (HM Treasury 2016; OECD
2016b; IMF 2016g).

CHAPTER 1

percentage points within a year in EMDEs in
ECA that are close trading partners (Chapter 3).
Policy uncertainty in EMDEs. In some EMDEs,
political and policy uncertainty reached new highs
in 2016. According to model estimates, a 1
standard-deviation shock to an index of countryspecific political risks reduces EMDE investment
by about 2 percent below the baseline within ayear (Chapter 3, Box 3.3). A confidence shock inmajor advanced economies, still the main trading
partners for many EMDEs, could further dent
EMDE investment growth.
Protectionism. Heightened policy uncertainty
could coalesce around increased protectionism.
New trade restrictions already reached a post-crisis
high in 2016 (WTO 2016; Evenett and Fritz
2016). Trade defense measures (anti-dumping
measures, countervailing duties, and safeguards)
have been the most commonly used instruments
in advanced economies, while EMDEs have used a
broader set of restrictive measures, including
import tariffs and export taxes. Even within theparameters of current international safeguards,
WTO members could, legally, triple importtariffs, which would lead to a 10-percent drop inworld trade from the baseline, and large welfare
losses for the world economy (Bouet and Laborde2008). These losses would disproportionately
affect the poorest EMDEs, which rely on trade asa key engine for growth and development (Foletti
et al. 2008; Evenett and Fritz 2015). The possible
undoing of existing trade agreements amid
increased protectionism would greatly exacerbate
welfare losses in EMDEs. A scenario of retaliatory
trade restrictions between the United States andChina could also lead to substantially slower
growth in the United States (Nolan et al. 2016).
Financial market risks
The prospects for increasing monetary policy
divergence and heightened policy uncertainty
in advanced economies, combined withdeteriorated credit quality in EMDEs, raises risksof financial market disruptions. In the UnitedStates, policy rates are expected to increase further,and there is a risk that market expectations could
adjust abruptly to signs of emerging inflation,

31

32

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.16 Risks - EMDE vulnerabilities
EMDE rating downgrades continued to outnumber upgrades in 2016,
particularly among oil exporters. High external financing needs in somecountries, widening fiscal and current account deficits among commodity
exporters, and elevated private sector debt are among key vulnerabilities.
Private sector debt deleveraging tends to be accompanied by a significant
deceleration in activity, particularly in an environment of weak investment.
A. Rating downgrades in 2016

B. Current account positions

Number30

Percent of global GDP
EMDE commodity importers ex. China
China
EMDE commodity exporters
1.5

UpgradesDowngrades

25
20

1.0

15

C. Impact of deleveraging on GDP

2016YTD

2014

2012

Commodity
importers

2010

Other
commodity
exporters

2008

Oil exporters

2006

-0.5

2004

0.0

0

2000

5

2002

0.5

10

D. Investment surges during recent
credit booms
Number of countries
Credit boom with investment surge
Credit boom without investment surge
Investment surge
25

Percent deviation from trendAll
2With investment slowdown
Without investment slowdown
1

30

20

0

15

-1

10

-2

5

-3
-3

-2

-1

0

1

2

3

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

0

-4

Sources: Bank for International Settlements, Bloomberg, Haver Analytics, World Bank.
A. Total number of sovereign rating changes from the three main credit rating agencies: Standard &Poor’s, Moody’s, and Fitch. Last observation is December 19, 2016.
B. Current account position is the share of current account deficit or surplus of EMDE country groupin percent of world GDP in current U.S. dollars. 2016YTD is based on data up to 2016Q3.
C. Group median of the cyclical components of GDP in percent of its trend (derived using a HodrickPrescott filter) for all deleveraging episodes (in blue), deleveraging episodes with investment
slowdown (occurred in two years around t=0, in red), and deleveraging episodes without investment
slowdown (in yellow).
D. A credit boom is defined as an episode during which the cyclical component of the nonfinancial
private sector credit-to-GDP ratio is larger than 1.65 times its standard deviation in at least one year.
Investment surge is defines as years when the cyclical component of the investment-to-GDP ratio is
at least 1 times its standard deviation while investment slowdown is a year when the cyclicalcomponent of the investment-to-GDP ratio is below minus one times its standard deviation.

potentially resulting in sharp swings in borrowing
costs and exchange rates.
The capacity of many EMDEs to absorb thesekinds of negative shocks remains limited, and it
has shrunk further for some commodity exporters.
Weak growth and persistent vulnerabilities have
led to EMDE rating downgrades, whichsignificantly outnumbered upgrades in 2016,
particularly among oil exporters (Figure 1.16).
Many EMDEs continue to be vulnerable to sharp
increases in borrowing costs, reflecting sizable
external financing needs, limited levels of foreign
reserves, and elevated domestic debt (Ghosh2016). Several major EMDEs are running elevatedcurrent account deficits, which are often financed
by volatile portfolio flows. Despite recent efforts
to lengthen the maturity of external debt, several
large EMDEs still have excessive short-term
external financing needs relative to reserves.
In most EMDEs, private debt buildups have been
below the pace associated with destabilizing surges
in the past, and EMDE banking sectors remain
well capitalized (World Bank 2016f). However,some EMDEs that had rapid credit growth in theaftermath of the global financial crisis are still
saddled with elevated domestic debt (Reinhart,
Rogoff, and Trebesh 2016; World Bank 2016f).
Moderating growth has increased the burden ofcarrying this debt. Private-sector debt deleveraging
in some countries could cause a further
deceleration in activity, as firms seek to shrink
their balance sheets and banks are negatively
affected by rising non-performing loans. This risk
is particularly high when investment starts to slow,
prior to the end of a credit boom.
Short-term risks of sharp increases in borrowing
costs. Long-term interest rates in the United Statesremain low, but have started increasing amid
rising prospects of a continued normalization of
U.S. monetary policy and of rising inflation
expectations (Fischer 2016; Williams 2016).
Uncertainty about the underlying strength of the
U.S. economy, future economic policy direction,and the appropriate course of monetary policy
remains
elevated.
Furthermore,marketexpectations of interest rate levels expected toprevail over the long run continue to be below
those of the U.S. Federal Open Market
Committee (Figure 1.17). An increase in yields
driven by a reassessment of monetary policy
expectations could have large adverse effect on
EMDE financial markets, capital flows, andactivity (Arteta et al. 2015). Eroding confidence inthe ability or willingness of the European Central
Bank and the Bank of Japan to deliver further
policy easing, combined with concerns about thehealth of the European banking sector, could
heighten volatility in global bond yields.
Short-term risks of renewed U.S. dollar
appreciation. A continued appreciation of the
U.S. dollar, as monetary policies in the UnitedStates and other major advanced economies

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Despite a rebound in U.S. long-term yields amid prospects of continued
monetary policy normalization, a gap in policy rate expectations between
market participants and members of the U.S. Federal Open Market
Committee remain over the medium term. This raises the risk of financial
market volatility. An increase in U.S. long-term yields driven by a suddenreassessment of monetary policy expectations could have sizable adverse
effects on EMDE equity markets.

Euro Area banks remain under significant
pressure, partly reflecting concerns about future
earnings and, for a number of vulnerable
institutions, insufficient capital buffers (Figure1.18). Further escalation of these pressures could
have international spillovers, as Euro Area banks
play a major role in the provision of syndicatedbank loans to EMDEs, accounting for about 23
percent of their global bank inflows. Under
persistently low- or negative-yielding bonds,
pension funds and life insurance companies mightalso struggle to generate adequate returns to meettheir long-term liabilities (Hannoun 2015; Geneva
Association 2015; IMF 2015c). In an effort tocompensate for negative or extremely low interest

B. Impact of rising U.S. long-termyields on EMDE equity prices

A. U.S. policy interest rate
expectations
Percent
5

Range
FOMC medianMarket expectations

Percent
4.0

4
2.0

3
2

0.0

1

Dec-16Sept-16

Dec-15

Dec-16Sept-14

Sept-16

Dec-150

End-2017

Longer-term risks associated with persistently
low interest rates. While a sudden increase inborrowing costs and risk aversion from current
low levels are dominant risks in the short term, amore prolonged period of low interest rates could
heighten financial stability risks over time. Adverse
effects include the erosion of profitability of banks
and other financial intermediaries, excessive risktaking, and distorted asset valuations that increase
the risk of booms and busts in asset prices.
Negative policy rates in several advanced
economies, if maintained for a significant periodof time, could amplify these risks (Arteta et al.
2016; Claessens, Coleman, and Donnelly 2016;
Borio, Gombacorta, and Hofman 2015).

33

FIGURE 1.17 Risks - Volatility around U.S. tightening
cycle

Sept-14

diverge or policy risks materialize, could raise debt
servicing costs and credit risks for EMDEs(Hofmann, Shim, and Shin 2016). The U.S.
dollar continues to play a unique role in theinternational transmission of monetary policy
shocks, and its appreciation generally coincides
with tighter global financial conditions and weakcommodity prices (Special Focus; Bruno and Shin2015). The share of both private and public debt
denominated in foreign currency, and the numberof countries with currency regimes tightly linked
to the U.S. dollar, have declined. However, somecountries with elevated short-term foreigncurrency-denominated debt and weak or
deteriorating current account positions, arevulnerable to rollover and interest rate risks, aswell as to a drying up of foreign exchange liquidity(Chow et al. 2015).

CHAPTER 1

Long run-2.0-4.0
Monetary shock

Real shock

Sources: Bloomberg, Federal Reserve Board, World Bank.
A. FOMC is the Federal Open Market Committee. Median is the median of forecasts submitted by
FOMC participants. The range is the difference between maximum and minimum forecast values.
The FOMC defines the long-run as the steady state level of the Federal Funds rate in the absence offurther shocks to the economy. Long-run market expectations are derived from 10-year-ahead
overnight swap rates. Last observation is December 19, 2016.
B. Impulse responses after 12 months from a PVAR model including EMDE industrial production,
long-term bond yields, stock prices, nominal effective exchange rates and bilateral exchange rates
against the U.S. dollar, and inflation, with monetary and real shocks as exogenous regressors.
Monetary shocks are defined as in Box 1 of Arteta et al. (2015). All data are monthly or monthly
averages of daily data, for January 2013-September 2015 for 23 EMDEs. For comparability, the sizeof the U.S. real and monetary shocks is normalized such that each shock raises EMDE bond yields
by 100 basis points on impact.

rates, insurance companies and other institutional
investors might increase their exposure to higheryielding, lower quality debt. Greater risk-taking
might eventually contribute to the formation ofasset bubbles, which could be particularly
damaging for the real economy if they take placein housing markets (Claessens, Kose, and Terrones
2012; Mian, Sufi, and Verner 2015).
Weakening potential growth
While partly reflecting cyclical factors, repeated
growth disappointments in recent years in bothadvanced economies and EMDEs suggest thatstructural factors are at work. Falling potential
output growth could reduce available fiscal spaceby reducing fiscal revenues and weakening
cyclically-adjusted primary balances. By depressing
real equilibrium interest rates, low potential
growth also exacerbates problems associated withthe lower bound of monetary policy interest rates.
In both advanced economies and EMDEs,

34

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.18 Risks - Low global interest rates andfinancial instability
In an environment of low global interest rates, concerns about bankprofitability intensified in 2016, particularly in the Euro Area. Increased
pressure on Euro Area banks could have international spillovers, as theyplay a major role in the provision of syndicated bank loans to EMDEs,
especially in Eastern Europe and Central Asia, and in Latin America andthe Caribbean.
A. Euro Area bank stocks and CDS
spreads

B. Share of cross-border lending flows
accounted by Euro Area banks

Index, Jan 1, 2012 = 100
160

Percent of EMDE total
50

Basis points
0

140

100

40

200

30

300

20

400

10

120
100

Jul-16

Jul-15Jan-16

Jul-14Jan-15

Jul-13

Jul-12

Jan-13Jan-12

60

Jan-14Equities (LHS)
CDS spread (RHS)

80

0
EAP

ECA

LAC

MNA

SAR

SSA

Sources: Bloomberg, European Central Bank, World Bank.
A. Equities refers to the Euro Stoxx500 banking sector sub-index. Subordinated bond CDS spreads
are from Bloomberg. Last observation is December 19, 2016.
B. EAP is East Asia and the Pacific, ECA is Eastern Europe and Central Asia, LAC is Latin America
and the Caribbean, MNA is the Middle East and North Africa, SAR is South Asia, and SSA is SubSaharan Africa. Bank claims are as of December 2015.

potential growth estimates have been reduced
considerably since the crisis (Didier et al. 2015).
This has reflected persistently low productivity
growth and, increasingly, weak investment
growth.
••Slowing productivity growth. Productivity
growth has slowed considerably since theglobal financial crisis, both in advanced
economies and EMDEs (Figure 1.19). The
rate of technological progress appears to havedeclined since the early 2000s. Diffusion
across countries might have been hampered byslower trade liberalization and financial
integration (Buera and Oberfield 2016).
Rapid population aging may exert additionalpressure on productivity growth. In particular,a rising proportion of older workers has been
associated with lower average productivity, as
well as slower innovation and technologicaldiffusion (Aksoy et al. 2015; Feyrer 2008;
World Bank 2015b).
Weak investment growth. Investment growth in
EMDEs slowed steadily from 10 percent in2010 to 3.4 percent in 2015, below its
long-term average of 5.1 percent (Chapter 3).

By slowing the rate of capital accumulationand technological progress embedded
in investment, weak investment has set backpotential output growth (OECD 2015).
Should investment continue to grow ata sluggish pace and long-term prospects
be further downgraded, the resulting slowdown in capital accumulation could reduce
EMDE potential output growth substantially.
The largest slowdowns would be felt
in commodity-exporting EMDEs, where
investment remains particularly weak.
By reducing policy space, weakening potential
growth further diminishes the ability of EMDEs
to absorb adverse shocks. One important type ofshock relates to growth disappointments in major
economies. In particular, weaker-than-expected
growth in the United States, the Euro Area, orChina could have severe consequences for the restof the world, given that these economies are
deeply integrated into regional and global supply
chains and finance, rendering them an importantsource of spillovers to EMDEs (World Bank
2016a).
Upside risk: fiscal stimulus in major
economies
While downside risks continue to dominate theoutlook, significant fiscal easing in major
economies could support a more rapid pace ofgrowth in global activity and investment in thenear term than currently expected, and thus
represents a substantial upside risk to the global
outlook.
United States
Proposals for sizable fiscal stimulus measures put
forward by the new administration in the UnitedStates—which have not been factored into
baseline projections in the absence of further
details about their scope—could result in fasterthan-anticipated U.S. growth in the near term.
These measures include reductions of corporate
and personal income tax rates, as well as plans
to stimulate infrastructure investment. However,the positive growth impact of these actions could
be offset by shifts in the pattern of federal
government outlays that result in sizable net

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Another proposal suggested by the newadministration is to cut personal income taxes,
especially for the highest-income earners; reduce
the number of individual income tax brackets; andchange the structure of tax deductions. If fully
implemented, these measures could reduce theaverage tax rate on personal income by about 2.5
percentage points, and by over 7 percentage points
for top income earners (Nunns et al. 2016). Sucha cut could—again, by itself—increase U.S. GDP
growth by around 0.3 percentage point after four
quarters following implementation and by
cumulatively 0.4 to 0.6 percentage point after
eight quarters, again depending in particular on
the reaction of monetary policy authorities.7

6These results are based on simulations using the Federal Reserve
Board’s model for the U.S. economy (FRB/US). Simulations assume
full implementation of both corporate and personal income tax cuts
at once (i.e. no phasing in). The lower estimate of the growth impact
after eight quarters assumes that monetary policy adjusts following a
traditional Taylor Rule. The upper estimate assumes no monetary
policy reaction. The net loss of corporate tax revenues, caused by a 15
percentage-point reduction in the effective marginal tax rate implied
by a 20 percentage-point statutory corporate income tax cut (Nunns
et al. 2016), could amount to 1.2 percent of GDP in the first year.
Implicitly, the fiscal multiplier—the additional output generated foreach additional dollar of tax losses—would be 0.4 in the first year,
which is within the range of available estimates (Chahrour, SchmittGrohé, and Uribe 2012).
7Results are also based on simulations using the FRB/US model.
The net loss of personal income tax revenues caused by a 2.5
percentage point reduction in the average effective marginal tax rate isestimated to be around 1.0 percent of GDP in the first year, with acorresponding fiscal multiplier of 0.3. This is at the lower end of theFalling productivity growth has narrowed policy options by reducing fiscal
space and depressing real equilibrium interest rates. Rapid population
aging may exert additional pressure on productivity growth in coming
years.
A. Labor productivity growth

B. Median productivity growth andold worker ratios in G20 economies

Percent
3

Percent

1990-2008 average

1.0

Ratio
Total factor productivity growth (LHS)16
Old worker ratio (RHS)

2

14

0.5

12

1
0.0

2015

2013

2011

2009

2007

2005

2003

2001

6

1999

EMDEs

8

-1.0

1997

2016

2010-15

2003-082016

2010-15

Advanced
economies

-0.5

1995

World

2003-08

10
2016

0

2010-15

Reduction in corporate and personal income
taxes. The fiscal proposals put forward by the new
U.S. administration include a cut in the statutory
corporate income tax rate from 35 to 15 percent.
Such a corporate income tax cut could—by itself
and without considering other policies by the newadministration—boost U.S. GDP growth byaround 0.6 percentage point after four quarters
following implementation, and by cumulatively
0.9 to 1.3 percentage points after eight quarters,
depending in particular on the reaction ofmonetary policy authorities.6

FIGURE 1.19 Risks - Weakening potential growth

2003-08

spending cuts, or by fiscal sustainability concerns.
Changes in some other U.S. policies, such aschanges in trade policy, could also offset thepositive effects of fiscal stimulus, or might even set
back growth.

35

CHAPTER 1

Sources: Conference Board, Eurostat, Organisation for Economic Co-operation and Development,
World Bank.
A. Labor productivity growth is the annual percent change in the ratio of real GDP to total hours
worked. Labor productivity data for 2016 are estimates.
B. Median of total factor productivity growth and old (55-64) worker ratio out of total employment in
G20 countries, excluding China and India. Total factor productivity growth is cyclically adjusted by
Hodrick–Prescott filter.

Taken together, these corporate and personal
income tax reforms could—without considerationof additional policy changes by the newadministration—raise U.S. GDP growth forecasts
to 2.2-2.5 percent in 2017 and 2.5-2.9 percent in2018.8 These estimates depend on the timing of
the tax cuts, the reaction of monetary policy
authorities, the amount of slack remaining in the
U.S. economy, and how businesses andhouseholds adjust their expectations to thesepolicy changes. In particular, the upper bound ofthese ranges assumes that both corporate andpersonal income tax cuts are fully implemented inrange of estimated fiscal multipliers generally associated with personal
income tax cuts (0.3-1.5), but within the range of estimated fiscal
multipliers associated with personal income tax cuts targeted tohigher-income households (0.1-0.6; Whalen and Reichling 2015).
8Tax cuts can support stronger near-term growth by boostinghouseholds’ real disposable income and companies’ after-tax earnings
and profit margins. According to FRB/US model simulations, thelargest short-term growth effect would be associated with corporate
income tax cuts, with investment being boosted by a rise in corporate
profits and a reduction in the cost of capital. The effect on
consumption would more limited, as household savings are projected
to increase following the personal income tax cut. In the case wheremonetary policy is allowed to react to a more rapid closing of theoutput gap, interest rates are estimated to increase by an additional 60
basis points after four quarters, and by up to 100 basis points after
eight quarters. The dollar would also appreciate, while inflation
would remain broadly unchanged. The revenue loss for thegovernment would increase the budget deficit by around 2.4 percent
of GDP after eight quarters.

36

CHAPTER 1

the second quarter of 2017, and monetary policy
does not react to the change in fiscal policy. In a
more realistic scenario where monetary policy
authorities adjust their policy stance, the growth
impact is somewhat reduced, particularly in 2018.
The lower bound of the range assumes bothdelayed implementation of the tax cuts to the firstquarter of 2018 and a tightening of monetary
policy in reaction to changes in fiscal policy. In
addition, these estimates do not specifically take
into account fiscal sustainability considerations.
Increase in infrastructure investment. The new
U.S. administration has signaled a number ofmeasures to stimulate infrastructure investment,
but specifics remain to be formulated for both theoverall size and the choice of measures (and,hence, their impact on activity). There have beensuggestions of increasing both public investment
in transportation and infrastructure and ofboosting private investment through tax credits.
Empirical studies suggest that increases ingovernment infrastructure investment tend tohave large immediate effects on activity, with fiscal
multipliers often estimated to be markedly above 1(Auerbach and Gorodnichenko 2013; Bivens
2014; Whalen and Reichling 2015). Empiricalevidence regarding the effect of tax credit andpolicy-driven support to private investment ininfrastructure in the United States is limited.
Studies of comparable initiatives in Europe point
to positive but limited net effects (Claeys andLeandro 2016). Until additional details are
unveiled, it is difficult to quantify the potential
impact of these measures on the outlook.
Changes in federal spending. The new U.S.
administration has suggested sizable cuts in nondefense spending, likely accompanied by increases
in defense spending. While specific proposals have
not yet been made, it is possible that, on net,
overall federal spending will be substantiallyreduced. Accordingly, the impact of corporate andpersonal income tax cuts and infrastructure
spending on aggregate demand could be offset in
the short term if overall federal spending is also
cut. This offsetting effect would depend on thesize of the net reduction in government outlays
and on the estimated fiscal multiplier of various
spending categories (Whalen and Reichling 2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Euro Area
While fiscal policy in the Euro Area is currently
expected to be broadly neutral to growth in 2017,
the European Commission has recommended amore expansionary stance, as it would lead to amore rapid closing of the output gap and restore
space for monetary policy action (European
Commission 2016). A fiscal expansion of up to
0.5 percent of GDP for the Euro Area as a whole
could help reduce the wedge between projected
inflation and the ECB’s 2 percent inflation target
in 2017, without creating undue overheating insome member states or concerns about fiscal
sustainability. Fiscal multipliers could beparticularly elevated in the current environment of
low interest rates and persistent economic slack(In't Veld 2016; Blanchard, Erceg, and Lindé2015). The optimal distribution of fiscal stimulus
measures across Euro Area countries would needto take into consideration available fiscal space andcyclical conditions.
Other major economies
If these fiscal stimulus measures in the UnitedStates and the Euro Area were to materialize, theywould follow analogous growth-enhancing actions
announced or already implemented by othermajor economies—particularly Japan and China.
In mid-2016, Japan’s government announced afiscal package aimed at supporting growth,
including new public spending and income
support measures. These measures are expected to
add around 0.3 percentage point to growth in2017, and account for the bulk of upside revisions
to Japan’s growth forecast. In China, growthenhancing fiscal policies throughout 2016—
including infrastructure investment and areduction of the tax burden on businesses—
continued to support economic activity amid
ample policy buffers. Chinese authorities recently
indicated that, in 2017, they will step up fiscal
measures aimed at supporting growth. Fiscal
policy targets will be published in March 2017.
Spillovers to the rest of the world
Fiscal loosening in major economies could lead tofaster-than-envisioned global growth in the near-GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

term. Stronger U.S. growth would help global
activity by raising U.S. demand for trading
partners’ exports (Special Focus). Empiricalestimates indicate that a 1 percentage-point shock
to U.S. growth could boost growth after one year
by 0.8 percentage point in other advanced
economies, and by 0.6 percentage point in
EMDEs (Figure 1.20).
In the illustrative scenario of reforms to U.S.
corporate and personal income taxes discussed
earlier, global growth (including the UnitedStates) could rise by up to 0.1 percentage point in2017 if the tax cuts are fully implemented in thesecond quarter of the year. In addition, global
growth could rise by at least 0.3 percentage pointin 2018, depending on the timing of the tax cutsand the reaction of U.S. monetary policy
authorities. While some of the proposed U.S.
corporate tax reforms could potentially affectcorresponding fiscal revenues in other countries
where U.S. corporations operate, the net global
impact of stronger activity and investment in the
United States is likely to be positive (Clausing,
Kleinbard, and Matheson 2016; Nicar 2015).
Beyond changes in corporate and personal income
taxes, some other U.S. policy changes should also
have beneficial cross-border effects. While theimport content of U.S. infrastructure is relatively
limited, additional infrastructure spending in the
United States should have positive domestic
supply-side effects and lead to beneficial spillover
effects for the rest of the world. However, as
discussed earlier, these positive spillovers could beoffset by changes in others U.S. policies—mostnotably, trade policies, particularly in the
hypothetical scenario that the United States
imposes tariff increases, and such increases trigger
retaliatory action by other countries.
An easing of the fiscal stance in the Euro Area
could further reinforce the positive impact on
global growth. Econometric analysis suggests thata 1 percentage-point increase in Euro Area growth
could boost global growth by 0.9 percentage point
after one year, with particularly sizable benefits forregional trading partners. In general, simultaneous
loosening of fiscal policy across the United States,
the Euro Area, and other major economies could

37

CHAPTER 1

FIGURE 1.20 Upside risk - fiscal stimulus in major
economies and growth spillovers
Significant fiscal easing in major advanced economies, particularly in the
United States, could support a more rapid recovery in global growth thancurrently assumed.
A. Impact of 1 percentage-point
increase in U.S. growth

B. Impact of 1 percentage-point
increase in Euro Area growth

Percentage point
2.5
Other advanced economies
EMDEs
2.0
Rest of the world
1.5

Percentage point
2.5
Other advanced economies

1.0

1.0

0.5

0.5

2.0
1.5

0.0

0.0

-0.5

-0.5
On impact

1 YearEMDEs
Rest of the world

2 YearOn impact

1 Year

2 Year

Source: World Bank.
A. Cumulative impulse response to a 1-percentage-point increase in GDP growth in the UnitedStates. Based on a Bayesian vector autoregression of global GDP growth (excluding the UnitedStates, other advanced economies or EMDEs), U.S. GDP growth, U.S. 10-year government bondyields plus J.P.Morgan’s EMBI spreads and GDP growth in other advanced economies or EMDEs.
B. Cumulative impulse response to a 1-percentage-point increase in GDP growth in the Euro Area.
Based on the same methodology described in A., replacing U.S. by Euro Area GDP growth.

help prevent excessive real effective exchange rateadjustments and lead to additional positive effects
for global growth (Frankel 2016; Auerbach and
Gorodnichenko 2016).

Policy challenges
Challenges in major economies
Among advanced economies,
unconventionalmonetary policies have become a common feature ofcentral banks’ toolkits in the post-crisis period. These
policies, while still needed in a number of countries tosupport growth and bring inflation back in line with
policy objectives, are facing increasing constraints. As
real equilibrium interest rates are expected to remain
low, the materialization of downside risks to growthmight necessitate more supportive fiscal policies. A
shift towards more expansionary fiscal policies isunderway in Japan and may materialize in the
United States. Although macroeconomic policies
should remain accommodative until clear evidence of
capacity constraints emerge, they need to be combinedwith prompt implementation of structural reforms toboost productivity and long-term growth. In China,
the main policy challenge is to increase the role ofmarkets and facilitate resource reallocation to highproductivity sectors, while reining in credit growth.

38

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.21 Advanced-economy monetary policies
U.S. monetary policy normalization is expected to continue, but policy rates
will likely increase at a gradual pace. The European Central Bank and the
Bank of Japan are expected to maintain policy rates in negative territory
until at least 2020. Despite some recovery during the second half of 2016,
long-term inflation expectations remain low and showed increasing
sensitivity to transitory price shocks in the post-crisis period.
A. Policy rates and market
expectations
Percent
7

B. Inflation expectations in the Euro
Area
Percent, 10-year expectations

United States
Euro Area
Japan

6

1

3

R² = 0.44

5
2

4
3
2

1
R² = 0.84

1
0
-1
2000

Pre-crisis
Post-crisis

0
0

2004

2008

2012

2016

2020

-1

0

1
2
3
Percent, 2-year expectations

Sources: Bloomberg; Haver Analytics; Holston, Laubach, and Williams (2016); World Bank.
A. Market expectations are derived from overnight indexed swap rates. Historical policy rates are forthe effective fed funds (United States), EONIA (Euro Area), and overnight call rate (Japan). Shaded
area indicates forecast. Last observation is December 19, 2016.
B. Inflation expectations are implied by zero-coupon Euro-denominated inflation swap rates. Precrisis includes 2005-2007. Post-crisis includes 2010-November 2016.

Monetary and financial policies in advanced
economies
Faced with a secular decline in real equilibrium
interest rates and with policy rates at or near theirlower bound, most major central banks are
expected to maintain low, and in some cases
negative, nominal policy interest rates over the
projection horizon. In the United States, where
inflation is approaching the 2 percent target andthe unemployment rate is below 5 percent, policy
rates will increase, but are expected to settle at alower level than in previous cycles (Figure 1.21). A
very gradual tightening of U.S. monetary policy
would eventually stimulate investment and labor
participation, and might therefore help reverse
some of the post-crisis deterioration in U.S.
potential growth (Yellen 2016).
In the Euro Area, negative policy interest rates andextensive unconventional measures implemented
by the European Central Bank have helped
support activity, but have so far failed to lift longterm inflation expectations, which remain below
target and have shown increasing sensitivity totransitory price shocks. In Japan, the Bank ofJapan tested new ground in September 2016 by
calibrating its asset purchase programs more

flexibly in order to stabilize long-term interest
rates at zero. Central banks in the Euro Area andJapan are expected to maintain exceptional levelsof policy accommodation until wage growth is ona clear upward trend, and inflation expectations
are firmly anchored around policy objectives.
While needed to support activity and inflation in
the short term, persistently low or negative interest
rates could entail growing challenges for financial
stability (Arteta et al. 2016; Hannoun 2015, Shin2016). Risks of asset price bubbles reinforce theneed for timely and effective macro-prudential
policies. The implementation of borrower-based
measures, such as loan-to-value and debt-toincome ratio caps, can help mitigate credit cycles(Cerutti, Claessens, and Laeven 2016). The
business models of financial institutions inadvanced economies will need to continue toadapt; further consolidation and cost-cutting
measures may be required to maintain profitability
in an era of low interest rates.
Fiscal policy in advanced economies
Low interest rates imply growing monetary andfinancial policy challenges, but they have also
contributed to a reassessment of the role of fiscal
policy. In particular, countercyclical fiscal
measures could more vigorously complementmonetary policy in stabilizing growth andinflation in this context (Christiano, Eichenbaum,and Rebelo 2011). Fiscal multipliers could benotably larger when interest rates are expected tostay low, and when many borrowers face tightcredit constraints (Woodford 2011; Carlstrom,
Fuerst, and Paustian 2013; Ferraresi, Roventini,and Fagiolo 2015).
However, the effectiveness of fiscal stabilization
would depend to some extent on how expectations
about long-run taxes and spending are affected,
even when interest rates are stuck at thelower bound (Denes, Eggertsson, and Gilbukh2013). Thus, fiscal stimulus measures would
best be combined with growth-friendly tax policies
and a credible commitment to debt sustainability
over the medium run. For countries in need offiscal stimulus, but lacking the necessary space,a reallocation of expenditures toward public
investment and tax reforms would need toGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Structural policies in advanced economies
Structural reforms in advanced economies could
further spur confidence in medium-term growthprospects, reverse the weakening of productivity
growth, and meet growing demographic
challenges. Moreover, a renewed commitment totrade liberalization in advanced economies would
support trade prospects, as these economies stillaccount for over 60 percent of global trade.
Although existing regional trade agreements have awide coverage, the numbers of new signed
agreements dropped in 2015 to its lowest level
since 1999 (Figure 1.23). To reduce protectionist
pressures, it is important that the benefits of tradeA. Public debt

B. Interest payments on public debt

Percent of GDP
250

2007Q4

Percent of GDP
3.0

Latest

2007Q4

Latest

2.5

200

2.0
150
1.5
100

1.0

50

0.5

0

0.0
Euro Area

United States

Japan

Euro Area

United StatesJapan

Sources: European Central Bank, Japan Cabinet Office, Organisation for Economic Cooperation andDevelopment, World Bank.
A. Latest is 2016Q3 for U.S. and Japan, and 2016Q2 for Euro Area.
B. Latest is 2016Q3 for U.S., 2016Q2 for Euro Area, and 2016Q1 for Japan.

FIGURE 1.23 Advanced-economy structural policies
Although existing regional trade agreements have a wide coverage, thenumber of new signed agreements dropped in 2015 to its lowest level
since 1999. Market entry of new companies has declined in the post-crisis
period, contributing to slower productivity growth.
B. Firm entry rate

Number of trade agreements
12

Percent
16
14
12
10
8
6
4
2
0

Japan

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

0

Italy

2

Germany

4

Spain

6

France8Pre-crisis
2010-2014 average

U.S.

10

U.K.

A. Advanced-economy trade deals
signed1995

In the United States, as discussed earlier, the newadministration’s campaign pledge to significantly
reduce corporate and personal income taxes andstimulate infrastructure investment would result ina more expansionary fiscal stance, if implemented.
In 2016, Japan announced the implementation ofa series of fiscal stimulus measures aimed at
supporting growth. In the Euro Area, a more
supportive fiscal stance to support economic
activity has been formally recommended tomembers states, but has not yet been implemented(European Commission 2016). Discussions on theneed for a more robust system of coordination of
fiscal policy have also made some progress,
although a more centralized fiscal capacity remains
a distant prospect (IMF 2016h).

Despite significantly higher public debt-to-GDP ratios in the post-crisis
period, low borrowing costs have reduced debt service burdens acrossmost advanced economies.

1993

Despite higher debt-to-GDP ratios in the postcrisis period (Figure 1.22), ultra-low borrowing
costs have led to a reduction in interest payments
across most advanced economies. This, combinedwith infrastructure deficiencies in many
economies, has reinforced the case for boosting
public investment. Enhancing the efficiency of
public administration and regulation could
increase the thresholds above which public debt
becomes detrimental to growth (Masuch,
Moshammer, and Pierluigi 2016b).

FIGURE 1.22 Advanced-economy fiscal policies

1991

be prioritized. Stronger and more predictablecounter-cyclical fiscal policies would support fasterrecoveries and reduce deflation risk in future
downturns,
without
jeopardizing
debt
sustainability (Elmendorf 2016; Buti and Gaspar
2015).

39

CHAPTER 1

Sources: Eurostat; Japanese Ministry of Health, Labor, and Welfare; Organisation for Economic
Cooperation and Development; World Bank.
A. Data are by years of entry into the trade agreement. Red line indicates average over the period.
B. Firm entry is calculated by taking the number of newly formed firms and dividing by the total
number of existing firms. Pre-crisis refers to the average of: 2004-2007 for the United States,
Japan, and Spain, 2005-2007 for Italy and Germany, 2006-2007 for the United Kingdom, and 2007
for France.

liberalization be shared more broadly. In
particular, national policies should be reinforced
to lower adjustments costs for those people most
exposed to risks. This includes greater efforts to
support skills development and re-training, tomodernize social protection systems, and tosupport labor mobility.
Policies that deliver more immediate support toboth private and public investment should beprioritized, including improvements in physical

40

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.24 China financial and structural policies
Addressing high credit growth, which has been accompanied by rapidly
rising housing prices, remains a key policy priority. Declining employment
in industrial sectors with overcapacity represents another important
challenge.
A. House price growth

B. Employment in key overcapacity
sectors

Percent, year-on-year
1st tier
1st tier (ex. Shenzhen)
40
2nd tier
3rd tier
30
Dashed line: 1990-2008 average

Million people
Coal mining & dressing
Non metallic mineral product25
Chemical material & productFerrous metal smelting & pressing
20

20

15

10
10

0

5

Mar-12
Jul-12
Nov-12Mar-13
Jul-13
Nov-13Mar-14Jul-14
Nov-14Mar-15
Jul-15
Nov-15Mar-16
Jul-16
Nov-16

-10

0
2000

2004

2008

2012

Oct-16

Source: China National Bureau Statistics.
A. Last observation is November 2016.
B. Last observation is October 2016. Other observations are annual averages.

infrastructures and human capital. In the absenceof sufficient space for monetary stimulus, fiscal
expansion, where appropriate, could be a usefulcomplement to front-load the benefit of structuralreforms (Eggertsson, Ferrero, and Raffo 2013).
Easier market entry for new companies, which has
dropped since the global financial crisis, should
help boost productivity (Bourles et al. 2013).
Product market reforms that facilitate competition
among firms and lessen the cost of market entry
through reduced regulatory barriers, particularly inservices, could help reduce the transition costs
associated with labor market reforms (Cacciatoreand Fiori 2016; Blanchard and Giavazzi 2003).
In the Euro Area, the integration of refugees into
the labor market has become a key policy
challenge (Fasani 2016). While integration has
typically been slow in the past, targeted activation
programs and tax exemptions for employers might
help kick-start the process (Aiyar et al. 2016;
Bilgili, Joki, and Huddleston 2015; Butschek andWalter 2014).
Policy challenges in China
A number of reforms have already been
implemented in China to facilitate the country’s
transition to a more market-oriented economy,
and to reduce its dependence on investment (IMF
2016a; World Bank 2016f). A revised budget law

and new rules on local borrowing have been
introduced, and a pilot property tax system has
been rolled out in a few cities, in an attempt to
put local government finances on a stronger
position. Regulations on nontraditional banking
activities have been tightened to reduce financial
risks. Interest rates have been liberalized, anddeposit insurance has been introduced, to support
a more efficient allocation of credit. In addition,
reforms to eliminate excess capacity in state-owned
enterprises have been initiated, which should
foster productivity growth and support sectoral
rebalancing (Figure 1.24). For example, theauthorities have announced additional capacity
reduction targets for coal and steel, and someprovinces have begun to restructure unviable
SOEs. As a result, employment in key
overcapacity sectors has declined.
The key policy challenge is to achieve a gradualslowing to a sustainable growth rate in themedium term while avoiding a sharp slowdown(World Bank 2016f). Additional fiscal reforms,
focused on relations across different levels ofgovernment, would place local government
finances on a more solid footing. Further reformof SOEs, such as additional restructuring of
unviable provincial enterprises, would boost
productivity and create new private sector jobs.
Reforms to address excess industrial capacity,which have been initiated, remain to becompleted. Land and hukou (labor market)
reforms could yield significant benefits in terms ofgrowth and employment. If accompanied bymeasures to reduce financial risks, capital accountand exchange rate liberalization could contributeto improved financial stability in the long term.
Elevated credit growth, which has beenaccompanied by rapidly rising housing prices, is an
important challenge. China’s credit gap—the
difference between the credit-to-GDP ratio and its
long-term trend—is well above that of other
EMDEs and of advanced economies. Reforms in
the corporate sector, and tighter prudential
measures, would help rein in credit growth andthereby reduce macroeconomic and financial
stability risks. In this context, recent measures tostrengthen financial regulations—including thosepertaining to shadow banking activities, such as

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

A. Inflation trends

B. Gap between inflation and target

Percent, year-on-year
Commodity exporters, floating ER
Commodity exporters, fixed ER
Commodity importers
8

Percentage points
25

6

10

10

Range

Median

Mean

20
15
5

4

0
-10
Apr-16 Jul-16 Nov-16 Apr-16 Jul-16 Nov-16

2016

2015

0

2014

-5

2013

2

Commodity exporters Commodity importers

C. Policy interest rates

D. EMDE bond and bank loan inflows,by currency

Percent
9Percent
100

Commodity exporters
Commodity importers

8

US$

Euro

Yen

Other

80

7
60

6

40

5
4

20

2016

2015

2014

3

2013

In the short term, macroeconomic policy challenges
vary across EMDEs. While many commodity
exporters face continued pressure to tighten monetaryand fiscal policy, commodity importers need tomaximize the benefits of past terms-of-trade gains.
Over the medium term, both groups need to reduce
vulnerabilities and rebuild policy space to cope with
future shocks, including those that could emanatefrom policy changes in advanced economies. The needfor domestic sources of growth in EMDEs increases
the urgency of structural reforms, particularly thosethat boost investment in human and physical capital.
Finding an appropriate balance between fiscal
adjustment needs and these long-term investments
will be challenging for some countries, suggesting aneed to mobilize multilateral resources. Enhancing
international integration by promoting services tradeand foreign direct investment could also help support
productivity and investment.

Divergence in inflation trends between commodity exporters and importers
continued in 2016. Inflation remains markedly high in commodity exporters
with floating exchange rates, and it is still above target levels in commodity
exporters more broadly, supporting a continued divergence in the path ofpolicy interest rates between exporters and importers. However, thewaning effect of currency depreciations in commodity exporters and of
past declines in energy prices for importers should narrow thesedivergences in 2017. The U.S. dollar remains a dominant currency forcapital flows to EMDEs, which increases the likelihood that sharp U.S.
dollar appreciation could cause EMDE financial distress.

2012

Challenges in emerging and developing
economies

FIGURE 1.25 EMDE monetary and financial policies

2012

wealth management products and peer-to-peer
lending—could be expanded. Strengthening the
responsibility and capacity of local governments tomanage debt, including contingent liabilities from
off-budget activities, could help limit financial
risks.

41

CHAPTER 1

0
Bank lending

Bond issuanceMonetary and financial policies
The decline in commodity prices in recent years
has resulted in diverging inflation trends among
EMDEs (Figure 1.25). Whereas inflation has
generally moderated in commodity importers, it
has picked up in commodity exporters—
particularly in those with floating exchange rate
regimes that experienced significant currency
depreciation. As a result, monetary policy has beentightened across commodity exporters.
Since the start of 2016, this divergence has
narrowed, reflecting the waning effects of earlier
depreciation on inflation. However, inflation incommodity exporters is still generally above
targets, limiting the ability of monetary authorities
to provide accommodation. In some commodity
exporters (Angola, Azerbaijan, Mongolia, Nigeria,
Mozambique), the monetary policy stance still

Sources: Bank for International Settlements, Bloomberg, Central Bank News, Haver Analytics,
World Bank.
A. Floating ER stands for floating exchange rate. Fixed ER stands for fixed exchange rate. Figure
includes 42 commodity-exporting and 33 commodity-importing countries and shows medianconsumer inflation in each of the respective groups. Last observation is November 2016.
B. Figure includes 24 commodity-exporting and 17 commodity-importing countries with a statedinflation target and for which current inflation data is available.
C. Figure includes 33 commodity-exporting and 20 commodity-importing countries and shows
unweighted averages of policy rates in each group. Last observation is November 2016.
D. Currency composition of EMDE bond issuance and cross-border bank lending. Data is forJune 2016.

remains notably contractionary. Inflation incommodity importers generally remains below
target, indicating that there is scope for some
central banks to loosen monetary policy(Hungary, Poland). This means that the paths ofpolicy interest rates in importers and exporters willcontinue to diverge in the near term. However,the projected modest rebound in commodity
prices in the next few years is likely to push up
inflation in commodity importers and eventuallylimit the scope for additional accommodation.

42

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.26 EMDE fiscal policies
Fiscal space remains limited among EMDEs. In commodity exporters,
fiscal balances and fiscal sustainability gaps deteriorated markedly
following the decline in commodity prices of the past three years, whilecommodity importers were not able to improve their fiscal positions. A
projected rise in oil prices will relieve some of the fiscal pressures inenergy exporters, but the uptick will not be enough to allow governments
to revert to the pace of spending growth observed prior to the oil pricebust. Fiscal adjustment will need to continue through the medium term inboth groups of countries.
A. Fiscal balance

B. Fiscal sustainability gap

Percent of GDP
0

Percent of GDP
0

-1

-1

-2
-3

-2

-4
-3

-5
-6

-4

-7

Commodity exporters
Commodity importers

-8
2014

2015

2016

2017

-5

Commodity exporters
Commodity importers
2014

2018

2015

C. Government spending growth

D. Government debt

Percent
12

Percent of GDP
60

Commodity exporters
Commodity importers

2016

Commodity exporters
Commodity importers

50

and Taskin 2014; Lane and McQuade 2014). In
addition, a more pronounced divergence inmonetary policies between the U.S. Federal
Reserve and other major central banks would
contribute to further dollar appreciation andhence heavier debt servicing costs and credit risks
for some EMDEs.
The weak macroeconomic environment in a
number of EMDEs may erode bank asset quality
and lead to an increase in non-performing loans.
This suggests the need for macro-prudential tools
to assess and bolster the resilience of the financial
system, including more frequent or more stringent
stress testing of bank and corporate balance sheetsand regulation to facilitate restructuring of nonperforming
corporate loans.
A generalstrengthening of the institutional environment—
including the speedy resolution of bankruptcies
and troubled assets, as well as the timely
restructuring of financial institutions—could
improve growth prospects while reducing
vulnerabilities.

940

Fiscal policy

30

6

20
3

10
0

0
2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

Sources: Haver Analytics, International Monetary Fund, World Bank.
A.C.D. Gray area denotes forecast.
A. Figure reflects unweighted average of 89 commodity-exporting and 62 commodity-importing
EMDEs.
B. Sustainability gap is measured as the difference between the primary balance and the debtstabilizing primary balance, assuming historical average (1990–2016) interest rates and growth rates.
The more negative the gap, the more unsustainable fiscal policy is assessed to be. Figure shows
unweighted average of 41 commodity-exporting and 24 commodity-importing EMDEs.
C. Figure reflects unweighted average of 84 commodity-exporting and 62 commodity-importing
EMDEs. República Bolivariana de Venezuela and South Sudan are excluded due to outlying data
during years shown.
D. Figure reflects unweighted average gross government debt of 86 commodity-exporting and 61
commodity-importing EMDEs.

The implementation of negative interest rate
policies by a number of major central banks hashelped contain the overall level of global interest
rates (Arteta et al. 2016). Easy financial conditions
supported a resumption of capital flows to
EMDEs for most of 2016 and may havecontributed to diversification of the currencycomposition of capital inflows. However, suddenchanges in market sentiment, or advancedeconomy policy changes, could make capital
inflows more volatile, while ongoing inflows
could, over time, generate vulnerabilities (Arslan

In general, fiscal space in EMDEs remains limited.
With fiscal deficits in commodity exporters havingbottomed out in 2016, the most acute negative impacts of the extended period of low
commodity prices on the government finances ofthese countries may have now passed (Figure1.26). However, as deficits remain high, especially in oil-exporting countries, fiscal policy
adjustment to low prices will need to continue
through the medium term in order to restore fiscal
sustainability. Spending and revenue plans
will need to be formulated strategically to stabilize
debt ratios.
For commodity importers, the anticipated rise incommodity prices, particularly for oil, suggeststhat further improvement in fiscal space via thereduction of spending on energy subsidies or othersocial support measures may become morepolitically challenging. Among exporters, while theexpected increase in commodity prices will relieve
some of the pressure on fiscal positions, the uptick
will not be rapid enough to offset the revenues lost
during the price collapse over the past few years.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Structural Policies
The limited room for macroeconomic policies toboost EMDE activity in the short term highlights
the pressing need for structural policies that
improve longer-term growth prospects. These
policies have complementary domestic andinternational dimensions. On the one hand,during a time of stalling trade liberalization and arising risk of protectionism, policies to promotefurther EMDE trade and financial integration are
essential. Reforms to support the integration of
EMDEs in global value chains, boost the growthof services trade, and maximize the benefits from
FDI would be particularly helpful. Policy
measures aimed to liberalize services trade and
FDI are especially important for EMDEs wherebarriers remain significant. These reforms would
need to be accompanied by measures to mitigate
adverse distributional effects of trade openness,such as the loss of certain types of jobs orincreased income inequality. On the other hand,Services account for about two-thirds of global economic output and are
positively associated with per-capita income. EMDEs perform well inservices exports such as tourism and transportation but have significant
untapped potential in other sectors, such as financial and communication
services. Notable barriers to services trade remain.
A. Services value added
1990

B. Size of services sector and income
per capita

2014

50% line

Services, percent of GDP
100
Advanced economies
90

EMDEs
Best fit line

80
70
60
50
40

MNA

SAR

ECA

SSA

30

EAP

LAC

World

Percent of GDP
80
70
60
50
40
30
20
10
0

20
6

8
10
GDP per capita, U.S. dollars

12

C. Composition of services exports

D. Size of services sector and trade
restrictions

Percent of total
30

Services, percent of GDP
90
Advanced economies
EMDEs
80
Best fit line
70

Advanced economies
EMDEs

20

Government

Personal

Business

Royalties

Financial

Information

Insurance

Construction

0

Communications

10

Travel

Low interest rates in advanced economies havehelped contain borrowing costs, particularly forcreditworthy borrowers. Broadly, though, EMDEs
need to improve their fiscal profiles in order toreach a position where budgets are sustainable
even as global financing conditions tighten. In themedium term, credible and well-designed fiscal
targets, medium-term expenditure frameworks,
broader tax bases, improved tax administration,and replenished stabilization funds can help
restore fiscal space. In a number of large EMDEs,
some of these aspects are included in ambitious
reform programs now in progress (e.g.,
implementation of the Goods and Services Tax inIndia, the National Transformation Plan in Saudi
Arabia) and will dominate the medium-term
domestic fiscal policy agenda. Follow-through on
the implementation of these programs is essential.
More generally, policymakers need to consider thecountry-specific short-term and long-term
ramifications of changes in tax structures andpublic spending composition for growth andinvestment.

FIGURE 1.27 Services trade in EMDEs

Transport

Continued weakness in global trade will also
constrain improvements in fiscal positions,particularly for commodity exporters.

43

CHAPTER 1

60
50
40
30
20
10
0
40

50
60
70
80
Services Trade Restrictiveness Index

Sources: Borchert, Gootiiz, and Mattoo (2012); United Nations Conference on Trade andDevelopment; World Bank.
A. EAP is East Asia and the Pacific, ECA is Eastern Europe and Central Asia, LAC is Latin America
and the Caribbean, MNA is the Middle East and North Africa, SAR is South Asia, and SSA is
Sub-Saharan Africa.
B. Horizontal axis denotes GDP per capita in purchasing power parity terms, in logarithm.
D. The Services Trade Restrictiveness Index (STRI) is a measure of the restrictiveness of a country’s
policy regime ranging from 0 (no restrictions) to 100 (completely closed). It covers 103 countries, fivesectors (telecommunications, finance, transportation, retail, and professional services) and the key
modes of service supply.

the protracted weakness and heightened policy
uncertainty in advanced economies, and limited
support from external demand, highlights theimportance of EMDE policies that strengthen
domestic demand and expand domestic sources of
productivity and long-term output growth, such as
investment in human and physical capital.
Services trade
Services account for about two-thirds of global
economic output, and over 50 percent of output
in most EMDE regions (Figure 1.27). The size ofthe services sector also exhibits a positive
association with per-capita income levels. Services
trade can be a stabilizing factor during an

44

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.28 Foreign direct investment in EMDEs
Despite softness in recent years, aggregate FDI stocks in EMDEs havebeen growing at a faster pace than those in advanced economies during
the last decade. While FDI flows between advanced economies are stillprevalent, EMDEs are becoming more attractive destinations for FDI,
especially for greenfield investment. In many EMDEs, barriers to FDI are
still significant or completely prohibitive, highlighting the scope for further
liberalization.

20
10

D. Barriers to FDI

US$, billion

Index
0.4

Greenfield FDI

Mergers and acquisitions

Advanced economies

2015

2010

2005

2000

1995

1990

1985

0

C. Composition of FDI

EMDEs

EMDEs

MexicoTunisia

Malaysia

2015

2010

2005

2015

2010

2005

Advanced economies

India

0

0

Jordan0.1

200

Indonesia

0.2

400

Saudi Arabia

600

Myanmar

800

China

0.3

Philippines

1000

Foreign direct investment

30

1980

2015

2010

2005

2000

1995

Percent of GDP
50
Advanced economies
EMDEs
40

1990

US$, trillions
US$, trillions
20
9
Advanced economies (LHS)
8
EMDEs (RHS)
7
15
6
5
10
4
3
5
2
1
0
0

1985

B. Inward FDI stocks

1980

A. Inward FDI stocks

obtaining business licenses and permits.9
Negotiations have resumed on provisions of theTrade in Services Agreement (WTO 2016a).
Appropriate policies to improve the linkages ofservices trade with other domestic sectors, and toenhance the export capacity of EMDEs, could
mobilize untapped sources of growth (Hoekman
and Mattoo 2008; World Bank 2016i).

Sources: Organisation for Economic Cooperation and Development, United Nations Conference on
Trade and Development, World Bank.
C. Greenfield FDI relates to investment projects that entail the establishment of new entities and thesetting up of offices, buildings, plants and factories from scratch abroad. Cross–border mergers andacquisitions entail the taking over or merging of capital, assets, and liabilities of existing enterprises.
D. FDI restrictiveness covers four types of measures: (i) foreign equity restrictions, (ii) screening andprior approval requirements, (iii) rules for key personnel, and (iv) other restrictions on the operation offoreign enterprises. The highest score is 1 (fully restricted to foreign investment) and the lowest is 0
(there are no regulatory impediments to FDI). Lines refer to averages of country groups.

economic crisis. For example, during the global
financial crisis, exports of services were lesssynchronized across countries than exports ofgoods, suffered a smaller decline, and, after thecrisis, recovered earlier than goods trade (Borcert
and Mattoo 2010; Ariu 2016). EMDEs generally
perform well in services exports such as tourism
and transportation. However, they lag behind inother sectors, including finance, insurance, andcommunication services (World Bank 2016h).
Notable barriers to services trade remain. The
most restrictive barriers involve limitations on theentry and establishment of foreign firms, local
content requirements, restrictions on the
movement of professionals, and discrimination in

Despite softness in 2015 and 2016, particularly incommodity exporters, and regional differencesnotwithstanding, aggregate FDI stocks in EMDEs
have been growing at a faster annual average pacethan those in advanced economies during the last
decade (Figure 1.28). Foreign affiliates generated
value-added of $7.9 trillion in 2015, or about 11
percent of world GDP, while employing about 79
million people (UNCTAD 2016). While FDI
flows between advanced economies are stillprevalent, EMDEs are becoming more attractive
destinations for FDI for greenfield investment, butless so for mergers and acquisitions.
Under appropriate conditions, FDI boosts output
growth in both home and host countries. FDI is astable source of a financing that can bridge the gap
between savings and investment of the hostcountry (Kose et al. 2009). Multinational
corporations (MNCs) are a prominent source oftechnology transfer and technical/management
skills (Gorg and Greenway 2004). Employment
effects on the host countries are generally
beneficial, as MNCs create additional employment
opportunities and, typically, pay higher wages
than domestic companies (Javorcik 2015; Martins
2004; World Bank 1997). MNCs can encourage
competition in the host country markets and thus
boost innovation. In addition, MNCs can bringindirect benefits by encouraging domestic reforms.
In many EMDEs, barriers to FDI are still
significant, and sometimes prohibitive—e.g.,
in real estate development, engineering services,and legal and accounting services. Because of the
9Barriers to services trade cover all four modes of supply of services
across borders: cross-border trade (mode 1), consumption abroad(mode 2), foreign commercial presence (mode 3), and the presence of
natural persons (professionals) abroad (mode 4).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

A. Health and education spending
in GDP

B. Five-year ahead EMDE growthforecasts

Percent
14
12
10
8
6
4
2
0

Percent
6

Investment in physical capital boosts capital
deepening and thus labor productivity growth.
The contribution of capital deepening to laborproductivity growth has been increasing since the1990s and has become a driving force of growth inproductivity in both EMDEs and LICs (WorldBank 2004a). In particular, higher levels of public
capital stock are closely associated with higher
levels of income per capita and tend to enhance
the productivity of other inputs (Jimenez 1995).
Commodity exporters, in particular, depend
strongly on reliable domestic road and port

4

2

2016

2014

2012

2010

4
6
8
10
12
14
16
18
Public capital stock (millions of U.S. dollars)

Education

6

Health7

Investment gap

Climate change

8

Food security

9

Percent of global GDP
1.4
Current investment
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Telecoms

10

D. SDG related investment needs

Power

GDP per capita

11

Advanced economies
EMDEs
Best fit line

0

Water andsanitation

C. Public capital stock and GDP per
capita12

Investment in human and physical capital iscritical for both growth and poverty alleviation(Aturupane, Glewwe, and Isenman 1994; WorldBank 2014). Externalities from such investment
can result in increasing return to scale and higher
long-run growth. Investment in human capitalraises labor productivity through the provision ofservices such as health, education, and nutrition(Gramlich 1994; World Bank 2008; Straub 2008;
World Economic Forum 2016). However,expenditure on these services in EMDEs is stillmuch below the average in advanced economies(Figure 1.29). Universal access to services such as
water, energy, health, and education have been
defined as core principles of the Sustainable
Development Goals (World Bank 2016j).

Advanced economies
EMDEs

Transport

Investment in infrastructure and human capital isa key component of a comprehensive effort topromote long-term EMDE growth. Wellmanaged public investment supports domestic
demand in the short run, crowds-in private
investment and trade under the rightcircumstances, and increases potential output inthe long run (Chapter 3).

Investment in human capital raises labor productivity through the provisionof services such as health and education. However, expenditures on these
services in EMDEs are still markedly below averages in advanced
economies. Infrastructure investment contributes to growth directly, as wellas an intermediate input that enhances the productivity of other inputs.
Unmet investment gaps are large.

Education

Investment in human and physical capital

FIGURE 1.29 Investment in human and physical capital

Healthlarge number of existing bilateral investment
agreements, and the lack of a unified and consistent FDI liberalization agenda, the international
investment system risks fragmentation andincoherence. Coordination at the multilaterallevel is necessary to ensure that international
investment agreements promote integrated andcoherent investment policies that favor
development goals (World Bank 2001).

45

CHAPTER 1

Sources: Consensus Forecasts, International Monetary Fund, Penn World Tables, United Nations
Conference on Trade and Development, World Bank.
B. Five year ahead Consensus Forecasts. Unweighted averages of 21 EMDEs. Latest available
month in the year denoted.
C. GDP per capita in purchasing power parity terms. Public capital stock in millions of 2005 constantpurchasing power parity dollars. GDP per capita and public capital stock in logarithm.
D. Investment refers to capital expenditure, operating expenditure is not included. Total investment
requirements are based on upper bound estimates by UNCTAD (2014).

infrastructure—especiallysomelandlocked
countries facing logistical obstacles to foreign
trade. Water and sanitation infrastructure
investment in LICs is essential to stay in pace withpopulation growth and urbanization: currently,
only one in four people have access to adequate
sanitation facilities in LICs (World Bank 2004b;
World Bank 2016j).
The urgent need to undertake these investments ishighlighted by unmet investment gaps associatedwith the U.N. Sustainable Development Goals(UNCTAD 2014). The investment gap isparticularly large for power, transport, education,and climate change. Undertaking these types ofinvestments will require public spending and

46

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 1.30 Impact of growth and inequality on poverty
reduction
With unchanged income distributions, a return to the high growth rates
EMDEs experienced in 2003-08 would reduce extreme poverty to theWorld Bank’s 3 percent target by 2030. However, if growth continues at
the weak pace observed in 2015, or if income inequality increases,
extreme poverty would remain significantly above target. Reaching the 3
percent poverty goal by 2030 will require both sustained growth anddetermined policy action to reduce income inequality.
A. Share of global poor in 2030 under
different growth scenarios

B. Evolution of the share of global
poor under different inequality
scenarios

Percent
15

Percent

Poverty rate (rising inequality)
Poverty rate (constant inequality)
Poverty rate (falling inequality)
3 percent poverty goal

12
9

9
6

6

3

3

2029

2027

2025

2023

2021

2015
growth2019

2010-14growth2017

1990-2008 2003-08
growth
growth

2015

0

0

2013

12

Poverty rate in 2030 (rising inequality)
Poverty rate in 2030 (constant inequality)
Poverty rate in 2013
3 percent poverty goal

Sources: Lakner, Negre, and Prydz (2014); World Bank.
A. Global poor is defined as the population living under US$1.90/day. Simulations based on a sample
of 113 EMDEs. “Poverty rate in 2030 (constant inequality)” corresponds to a scenario where income
per capita growth of the bottom 40 percent and the mean population is the same in each country.
“Poverty rate in 2030 (rising inequality)” corresponds to a scenario where income per capita growth of
the bottom 40 percent is lower than that of the mean population income by 2 percentage points per
year in each country.
B. Assumes that income per capita growth over the period 2014-30 equals the long-term average(1990-2008) for each country. “Poverty rate (rising inequality)” corresponds to a scenario where
income per capita growth of the bottom 40 percent is lower than that of the mean population income
by 2 percentage points per year in each country. “Poverty rate (constant inequality)” corresponds to a
scenario where income per capita growth of the bottom 40 percent and the mean population is thesame in each country. “Poverty rate (falling inequality)” corresponds to a scenario where income percapita growth of the bottom 40 percent is higher than that of the mean population income by 2
percentage points per year in each country.

efforts geared towards improving existing delivery
mechanisms (World Bank 2016h). However,many of the EMDEs facing pressing investment
needs have very limited fiscal space. For thesecountries, finding an appropriate balance between
fiscal adjustments needed in the short term andstructural policies aimed at supporting unmet
investment needs will be particularly challenging.
This dilemma could be somewhat eased—todifferent extents across countries and regions—by
the aforementioned fiscal reform efforts. In
addition, the multilateral community, includinginternational financial institutions, should make ita priority to coordinate and mobilize fiscal
resources to enhance these countries’ ability tomeet their investment needs, particularly in acontext of low global interest rates and modest
average borrowing costs. The returns from welldesigned programs, in the form of improved
productivity and long-term prosperity, are likely
to easily exceed the current low real costs of longterm borrowing.
Poverty and income inequality
Growth has been the main driver of poverty
reduction over the last two decades—even more sothan changes in income distribution (World Bank
2016k). Repeated growth disappointments,
particularly
amongcommodity-exporting
countries, and slowing potential growth across
EMDEs could set back progress toward poverty
reduction goals (Lakner, Negre, and Prydz 2014).
If income per capita would continue to grow at
the weak pace observed in 2015, extreme poverty
would remain significantly above the WorldBank’s 3 percent target by 2030 (Figure 1.30). In
contrast, a return to high pre-crisis (2003-08)
growth rates in EMDEs could reduce extreme
poverty to 3 percent by 2030, unless income
inequality increases. In an intermediate scenario
where growth stabilizes around its long-term
average (1990-08), the poverty reduction goal
would only be attainable if there is a sustained
reduction in income inequality.
The eradication of extreme poverty will therefore
require both robust growth and determined policy
action. Such policy action includes domestic
policies focusing on safety nets, human capital,
and infrastructure development. Beyond country
specificities, key policy areas include earlychildhood development, universal health care,
universal access to good-quality education,
conditional cash transfers, investments in ruralroads and electrification, and taxation. If welldesigned, these policies can have favorable effects
on both inequality and poverty reduction, withoutmajor efficiency and equity trade-offs.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 1

47

ANNEX TABLE 1 List of emerging market and developing economies1
Commodity Exporters2

Commodity Importers3

Albania*

MalawiAfghanistan

Pakistan

Algeria*

Malaysia*

Antigua and Barbuda

Palau

Angola*Mali

Bahamas, The

PanamaArgentina

Mauritania

Bangladesh

Philippines

Armenia

Mongolia

Barbados

PolandAzerbaijan*

MoroccoBelarusRomania

Bahrain*Mozambique

BhutanSamoa

BelizeMyanmar*Bosnia and Herzegovina

SerbiaBenin

Namibia

Bulgaria

Seychelles

Bolivia*

Nicaragua

Cabo Verde

Solomon Islands

Botswana

Niger

Cambodia

St. Kitts and Nevis

BrazilNigeria*

China

St. Lucia

Burkina Faso

Oman*

Comoros

St. Vincent and the Grenadines

BurundiPapua New Guinea

Croatia

Swaziland

Cameroon*

Paraguay

Djibouti

Thailand

Chad*

Peru

Dominica

Tunisia
TurkeyChile

Qatar*

Dominican Republic

Colombia*

Russia*Egypt, Arab Rep.

TuvaluCongo, Dem. Rep.

RwandaEl Salvador

VanuatuCongo, Rep.*

Saudi Arabia*

EritreaVietnamCosta Rica

SenegalFiji

Côte d'Ivoire

Sierra Leone

Georgia

Ecuador*South Africa

GrenadaEquatorial Guinea*

Sri Lanka

Haiti

Ethiopia

Sudan*

Hungary

Gabon*

Suriname

India

Gambia, The

Tajikistan

Jamaica

Ghana*

Tanzania

JordanGuatemalaTimor-Leste*

Kiribati

GuineaTogo

KosovoGuinea-Bissau

Tonga

LebanonLesothoGuyanaTrinidad and Tobago*

Honduras

Turkmenistan*

Liberia

Indonesia*

UgandaMacedonia, FYR

Iran, Islamic Rep.*

UkraineMaldives

Iraq*

United Arab Emirates*

Marshall Islands

Kazakhstan*

Uruguay

Mauritius

Kenya

Uzbekistan

MexicoKuwait*Venezuela, RB*

Micronesia, Fed. Sts.

Kyrgyz RepublicWest Bank and Gaza

Moldova, Rep.

Lao, PDR

ZambiaMontenegro

Madagascar

Zimbabwe

Nepal

1 Emerging Market and Developing Economies (EMDEs) includes all those that are not classified as advanced economies. Advanced economies include Australia; Austria; Belgium; Canada;
Cyprus; the Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China; Iceland; Ireland; Israel; Italy; Japan; the Republic of Korea; Latvia; Lithuania;
Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; San Marino; Singapore; the Slovak Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; and the UnitedStates.
2 Energy exporters are denoted by an asterisk. An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent ormore of total goods exports or (ii) exports of any single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of reexports were excluded. When data were not available, judgment was used. This taxonomy results in the classification of some well-diversified economies as importers, even if they areexporters of certain commodities (e.g., Mexico).
3 Commodity importers are all EMDE economies that are not classified as commodity exporters.

48

CHAPTER 1

References
Aaronson, S., T. Cajner, B. Fallick, F. GalbisReig, C. L. Smith, and W. Wascher. 2014. “Labor
Force Participation: Recent Developments andFuture Prospects.” Federal Reserve Bank of
Cleveland Working Paper.
Aiyar, S., B. Barkbu, N. Batini, H. Berger, E.
Detragiache, A. Dizioli, C. Ebeke, et al.. 2016.
“The Refugee Surge in Europe: Economic
Challenges.” Staff Discussion Notes 16/2,
International Monetary Fund, Washington, DC.
Aksoy, Y., H. Basso, T. Grasl, and R. Smith.
2015.
“Demographic
StructureandMacroeconomic Trends.” Working Papers in
Economics and Finance 1501, Birkbeck
University of London.
Ariu, A. 2016. “Crisis-Proof Services: Why Tradein Services did not Suffer During the 2008–2009
Collapse.” Journal of International Economics 98:
138-149.
Arslan, Y., and T. Taskin. 2014. “International
Evidence on the Interaction between Cross-Border
Capital Flows and Domestic Credit Growth.”
Working Paper 14/18, Central Bank of the
Republic of Turkey, Ankara.
Arslanalp, S., and D. Botman. 2015. “Portfolio
Rebalancing in Japan: Constraints and
Implications for Quantitative Easing.” IMF
Working Paper 15/186, International Monetary
Fund, Washington, DC.
Arteta, C., M. A. Kose, F. Ohnsorge, and M.
Stocker. 2015. “The Coming U.S. Interest Rate
Tightening Cycle: Smooth Sailing or Stormy
Waters?” Policy Research Note 15/02, World
Bank, Washington, DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Auerbach, A., and Y. Gorodnichenko. 2012.
“Measuring the Output Responses to Fiscal
Policy.” American Economic Journal: Economic
Policy 4 (2): 1-27.
________. 2016. “Effects of Fiscal Shocks in a
Globalized World.” IMF Economic Review 64 (1):
177-215.
________. 2013. “Fiscal Multipliers in Recession
and Expansion.” In Fiscal Policy after the Financial
Crisis Working Paper, edited by A. Alesina and F.
Giavazzi. University of Chicago Press.
Baffes, J., M. A. Kose, F. Ohnsorge, and M.
Stocker. 2015. “The Great Plunge in Oil Prices:
Causes, Consequences, and Policy Response.”
Policy Research Note 15/01, World Bank,
Washington, DC.
Baker, S., N. Bloom, and S. Davis. 2013.
“Measuring Economic Policy Uncertainty.”
NBER Working Paper 21633, National Bureau of
Economic Research, Cambridge, MA.
BIS (Bank for International Settlements). 2016.
“Statistical Bulletin.” BIS Quarterly Review(September): 247–273.
Behar, A., and A. Fouejieu. 2016. “External
Adjustment in Oil Exporters: The Role of Fiscal
Policy and the Exchange Rate.” Working Paper
16/107,
International
Monetary
Fund,
Washington, DC.
Bilgili, Ö., A. Joki, and T. Huddleston. 2015.
“The Dynamics between Integration Policies andOutcomes: A Synthesis of the Literature.”
Unpublished paper, Migration Policy Group,
Brussels.

Arteta, C., M. A. Kose, M. Stocker, and T.
Taskin. 2016. “Negative Interest Rate Policies:
Sources and Implications.” Discussion Paper
11433, Centre for Economic Policy Research,
London.

Bivens, J. 2014. “The Short- and Long-Term
Impact of Infrastructure Investments on
Employment and Economic Activity in the U.S.
Economy.” EPI Briefing Paper #374, Economic
Policy Institute, Washington, DC.

Aturupane, H., P. Glewwe, and P. Isenman. 1994.
“Poverty, Human Development, and Growth: An
Emerging Consensus?” American Economic Review
84 (2): 244-249.

Blanchard, O., and F. Giavazzi. 2003.
“Macroeconomic Effects of Regulation and
Deregulation in Goods and Labor Markets.”
Quarterly Journal of Economics 118 (3): 879-907.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Blanchard, O., C. J. Erceg, J. Lindé. 2015. “JumpStarting the Euro Area Recovery: Would a Rise inCore Fiscal Spending Help the Periphery?”Working Paper 21426, National Bureau of
Economic Research, Cambridge, MA.
Borchert, I., and A. Mattoo. 2010. “The CrisisResilience of Services Trade.” The Service Industries
Journal 30 (13): 2115-2136.
Borio, C., L. Gombacorta, and B. Hofmann.
2015. “The Influence of Monetary Policy on Bank
Profitability.” Working Paper 514, Bank forInternational Settlements, Basel.
Bouet, A., and D. Laborde. 2010. “Assessing the
Potential Cost of a Failed Doha Round.” World
Trade Review 9 (02): 319-351.
Bourlès, R., G. Cette, J. Lopez, J. Mairesse, andG. Nicoletti. 2013. “Do Product Market
Regulations in Upstream Sectors Curb
Productivity Growth? Panel Data Evidence forOECD Countries.” The Review of Economics andStatistics 95 (5): 1750-1768.
Brayton, F., T. Laubach, and D. Reifschneider.
2014. “The FRB/U.S. Model: A Tool for
Macroeconomic Policy Analysis.” FEDS Notes,
Board of Governors of the Federal Reserve
System, Washington, DC.
Bruno, V., and H. Shin. 2015. “Cross-Border
Banking and Global Liquidity.” Review of
Economic Studies 82 (2): 535-564.
Buera, J., and E. Oberfield. 2016. “The Global
Diffusion of Ideas.” Working Paper 21844,
National Bureau of Economic Research,
Cambridge, MA.

CHAPTER 1

Markets Deregulation.” Review of Economic
Dynamics 20 (April): 1–24.
Carlstrom, C., T. Fuerst, and P. Matthias. 2013.
“Policy Multipliers Under an Interest Rate Peg of
Deterministic Versus Stochastic Duration.”
Working Papers 475, Bank of England, London.
Cerutti, E., S. Claessens, and L. Laeven.
Forthcoming 2016. “The Use and Effectiveness ofMacroprudential Policies: New Evidence.” Journalof Financial Stability.
Chahrour, R., S. Schmitt-Grohé, and M. Uribe.
2012. “A Model-Based Evaluation of the Debate
on the Size of the Tax Multiplier.” American
Economic Journal: Economic Policy 4 (2): 28–45.
Chen, P., C. Wang, and Y. Liuc. 2015. “RealEstate Prices and Firm Borrowings: MicroEvidence from China.” China Economic Review 36(December): 296–308.
Chow, J. T. S., F. Jaumotte, S. G. Park, and Y. S.
Zhang.
2015.
“Spillovers
fromDollarAppreciation.” Policy Discussion Paper 15/2,
International Monetary Fund, Washington, DC.
Christiano, L., M. Eichenbaum, and S. Rebelo.
2011. “When is the Government Spending
Multiplier Large?” Journal of Political Economy
119 (1): 78–121.
Claessens, S., M. A. Kose, and M. E. Terrones.
2012. “How Do Business and Financial Cycles
Interact?” Journal of International Economics 87(1): 178-190.

Buti, M., and V. Gaspar. 2015. “Designing Fiscal
Policy for Steady, Enduring Growth.” VoxEU,
http://voxeu.org/article/fiscal-policy-enduringgrowth.

Claessens, S., N. Coleman, and M. Donnelly.
2016. “Low-for-long Interest Rates and Net
Interest Margins of Banks in Advanced Foreign
Economies.” International Finance Discussion
Papers Notes, Board of Governors of the Federal
Reserve System, Washington, DC.

Butschek, S., and T. Walter. 2014. “What Active
Labour Market Programmes Work for Immigrants
in Europe? A Meta-Analysis of the Evaluation
Literature.” IZA Journal of Migration 3 (48).

Claeys G., and A. Leandro. 2016. “Assessing theJuncker Plan after one year.” Bruegel.org, May 17.
http://bruegel.org/2016/05/assessing-the-junckerplan-after-one-year/.

Cacciatore, M., and G. Fiori. 2016. “TheMacroeconomic Effects of Goods and Labor

CBO (Congressional Budget Office). 2016. An
Update to the Budget and Economic Outlook: 2016

49

50

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

to 2026. Washington, DC: Congressional Budget
Office.

Spending Multipliers.” Economic Journal 123,
F133–F163.

Clausing, K., E. Kleinbard, and T. Matheson.
2016. “U.S. Corporate Income Tax Reform andits Spillovers.” Working Paper 16/127,
International Monetary Fund, Washington, DC.

Didier, T., M. A. Kose, F. Ohnsorge, and L. S.
Ye. 2015. “Slowdown in Emerging Markets: A
Rough Patch or Hard Landing?” Policy Research
Note 15/04, World Bank, Washington, DC.

Constantinescu, I. C., A. Mattoo, and M. Ruta.
2015. “The Global Trade Slowdown: Cyclical or
Structural?” Policy Research Working Paper 7158.
World Bank, Washington, DC.

Elmendorf, D. 2016. “Recommendations forFederal Fiscal Policy.” Speech at the Federal
Reserve Bank of San Francisco, “Macroeconomics
and Monetary Policy,” San Francisco, March 4.

________. 2016a. “Does the Global Trade
Slowdown Matter?” Policy Research Working
Paper 7673. World Bank, Washington, DC.
________. 2016b. “Global Trade Watch: Trade
Developments in 2015.” World Bank,
Washington, DC.
Crozet, M., C. Emlinger, and S. Jean. 2015. “Onthe Gravity of World Trade's Slowdown.” In The
Global Trade Slowdown: A New Normal, edited by
B. Hoekman, 179-196. London: Centre for
Economic Policy Research.
Dabla-Norris, E., J. Brumby, A. Kyobe, and C.
Papageorgiou. 2012. “Investing in Public
Investment: An Index of Public Investment
Efficiency.” Journal of Economic Growth 17: 235266.
Davis, S. 2016. “An Index of Global Economic
Policy Uncertainty.” NBER Working Paper No.
22740, National Bureau of Economic Research,
Cambridge, MA.
De la Torre, A., D. Lederman, A. Ize, F. Bennett,
and M. Sasson. 2016. The Big Switch in Latin
America: Restoring Growth through Trade. LAC
Semiannual Report, October 2016. Washington,
DC: World Bank.
Decker, R., J. Haltiwanger, R. Jarmin, and J.
Miranda. 2015. "Where Has All The Skewness
Gone? The Decline in High-Growth (Young)Firms in the U.S." Working Paper 21776,
National Bureau of Economic Research,
Cambridge, MA.
Denes, M., G. Eggertsson, and S. Gilbukh. 2013.
“Deficits, Public Debt Dynamics and Tax andEggertsson, G., A. Ferrero, and A. Raffo. 2013.
“Can Structural Reforms Help Europe?”
International Finance Discussion Papers 1092,
Board of Governors of the Federal Reserve
System, Washington, DC.
European Commission. 2016. Communicationfrom the Commission to the European Parliament,
the Council, the European Economic and Social
Committee and the Committee of the Regions:
Towards a Positive Fiscal Stance for the Euro Area.
Brussels, Belgium: European Commission.
Evenett, S. J., and J. Fritz. 2015. Throwing Sand in
the Wheels: How Trade Distortions Slowed LDC
Export-Led Growth. London: Centre for Economic
Policy Research.
________. 2016. Global Trade Plateaus: The 19th
Global Trade Alert Report. London: Centre for
Economic Policy Research.
Fan, Y. Z. H. 2004. “Will FDI Cause Balance ofPayments Crisis?” Economic Research Journal 11.
Fasani, F. 2016. “Refugees and Economic
Migrants: Facts, Policies and Challenges.”
VoxEU.org, October 31. http://voxeu.org/
content/refugees-and-economic-migrants-factspolicies-and-challenges.
Federal Open Market Committee (FOMC). 2016.
“Economic Projections of Federal Reserve Board
Members and Federal Reserve Bank Presidents
Under their Individual Assessments of Projected
Appropriate Monetary Policy, September 2016.”
Board of Governors of the Federal Reserve
System, Washington, DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Feyrer, J. 2008. “Aggregate Evidence on the Link
Between Age Structure and Productivity.”
Population and Development Review 34: 78-99.
Fernald, J. 2014. “Productivity and Potential
Output Before, During, and After the GreatRecession.” Work Paper 20248, National Bureau
of Economic Research, Cambridge, MA.
________. 2016. “Reassessing Longer-run U.S.
Growth: How Low?” Working Paper 2016/18,
Federal Reserve Bank of San Francisco.
Ferrantino, M., and D. Taglioni. 2014. “Global
Value Chains in the Current Trade Slowdown.”
Economic
Premise
137,
World
Bank,
Washington, DC.
Ferraresi, T., A. Roventini, and G. Fagiolo. 2015.
“Fiscal Policies and Credit Regimes: A TVAR
Approach.” Journal of Applied Econometrics 30 (7):1047–1072.
Fischer, S. 2016. “Why Are Interest Rates So
Low? Causes and Implications.” Speech to the
Economic Club of New York, New York City,
October 17.
Foletti, L., M. Fugazza, A. Nicita, and M.
Olarreaga. 2009. “Smoke in the Water: The Useof Tariff Policy Flexibility in Crises.” Policy
Research Working Paper 5050, World Bank,
Washington, DC.
Forbes, K., D. Reinhardt, and T. Wieladek. 2016.
“The Spillovers, Interactions, and (Un)Intended
Consequences of Monetary and Regulatory
Policies.” Working Paper 22307. National Bureau
of Economic Research, Cambridge, MA.
Frankel, J. 2016. “International Coordination.”
Working Paper 21878, National Bureau of
Economic Research, Cambridge, MA.
Geneva Association. 2015. “The Impact of Low
Interest Rates on the Insurance Sector and Its
Economic Role.” Research Reports, Geneva
Association, Zurich.
Gervais, O., L. Schembri, and L. Suchanek. 2016.
“Current Account Dynamics, Real Exchange Rate
Adjustment, and the Exchange Rate Regime in

CHAPTER 1

Emerging-market Economies.” Journal
Development Economics 119: 86-99.

ofGhosh, S. 2016. “Monitoring Macro-Financial
Vulnerability: A Primer.” Discussion Paper 14,
Macroeconomics and Fiscal Management Global
Practice, World Bank, Washington, DC.
Görg, H., and D. Greenaway. 2004. “Much Ado
about Nothing? Do Domestic Firms Really
Benefit From Foreign Direct Investment?” The
World Bank Research Observer 19 (2): 171-197.
Gramlich, E. M. 1994. “Infrastructure
Investment: A Review Essay.” Journal of Economic
Literature 32 (3): 1176-1196.
Handley, K. 2014. “Exporting Under Trade
Policy Uncertainty: Theory and Evidence.” Journalof International Economics 94 (1): 50-66.
Handley, K., and N. Limao. 2015. “Trade andInvestment Under Policy Uncertainty: Theory andFirm Evidence.” American Economic Journal:
Economic Policy 7 (4): 189-222.
Hannoun, H. 2015. “Ultra-Low or Negative
Interest Rates: What They Mean for Financial
Stability and Growth.” Speech at the Eurofi HighLevel Seminar, “Fostering Growth in a Highly
Indebted EU Environment,” Riga, April 22-24.
Haugh, D., A. Kopoin, E. Rusticelli, D. Turner,
and R. Dutu. 2016. “Cardiac Arrest or Dizzy
Spell: Why is World Trade So Weak and What
Can Policy Do about It?” OECD Economic
Policy Papers 18, OECD, Paris.
HM Treasury. 2016. HM Treasury Analysis: The
Long-term Economic Impact of EU Membership andthe Alternatives. London, UK: H.M. Treasury.
Hoekman, B., and A. Mattoo. 2008. “Services
Trade and Growth.” Policy Research Working
Paper 4461, World Bank, Washington, DC.
Hofmann, B., I. Shim, and H. S. Shin. 2016.
“Sovereign Yields and the Risk-Taking Channel ofCurrency Appreciation.” Working Paper 538,
Bank for International Settlements, Basel.
Holston, K., T. Laubach, and J. Williams. 2016.
“Measuring the Natural Rate of Interest:

51

52

CHAPTER 1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

International Trends and Determinants.”
Working Paper 2016/11, Federal Reserve Bank of
San Francisco, San Francisco.

________. 2016g. “United Kingdom: Selected
Issues.” Country Report 16/169, International
Monetary Fund, Washington, DC.

Hordahl, P., J. Sobrun, and P. Turner. 2016.
“Low Long-term Interest Rates as a Global
Phenomenon.” Working Papers 574, Bank forInternational Settlements, Basel.

________. 2016h. “Euro Area 2016 Article IV
Consultation—Selected Issues.” International
Monetary Fund, Washington, DC.

Horton, M. A., H. Samiei, N. P. Epstein, and K.
Ross. 2016. “Exchange Rate Developments andPolicies in the Caucasus and Central Asia.”
Middle East and Central Asia Departmental Paper
16/2, International Monetary Fund, Washington,
DC.
IMF (International Monetary Fund). 2015a. Fiscal
Monitor: The Commodities Roller Coaster – A Fiscal
Framework for Uncertain Times. Washington, DC:
International Monetary Fund.
________. 2015b. “Cambodia: 2015 Article IV
Consultation Staff Report.” International
Monetary Fund, Washington, DC.
________. 2015c. Global Financial Stability
Report: Vulnerabilities, Legacies, and Policy
Challenges – Risks Rotating to Emerging Markets.
Washington, DC: International Monetary Fund.
________. 2016a. “People’s Republic of China
2015 Article IV Consultation—Staff Report.”
International Monetary Fund, Washington, DC.
________. 2016b. “Russian Federation 2016
ArticleIV
Consultation—Staff
Report.”International Monetary Fund, Washington, DC.
________. 2016c. “Brazil 2016 Article IV
Consultation—Staff
Report.”International
Monetary Fund, Washington, DC.
________. 2016d. “Peru: Selected Issues.”
Country Report 16/235, International Monetary
Fund, Washington, DC.
________. 2016e. “Republic of Azerbaijan 2016
ArticleIV
Consultation—Staff
Report.”International Monetary Fund, Washington, DC.
________. 2016f. “Nigeria 2016 Article IV
Consultation—Staff
Report.”International
Monetary Fund, Washington, DC.

In't Veld, J. 2016. “Public Investment Stimulus in
Surplus Countries and their Euro Area Spillovers.”
Economic Brief 016, European Commission,
Brussels.
Ito, T., S. Koibuchi, K. Sato, and J. Shimizu.
2015. “How do Japanese Exporters Manage Their
Exchange Rate Exposure?” VoxEU.org, June 29.
http://voxeu.org/article/how-do-japaneseexporters-manage-their-exchange-rate-exposure.
Iwata, K., I. Fueda-Samikawa, and E. Takahashi.
2016. “Risks and Challenges for BOJ after
breaking through ZLB-Accelerate move toward
establishing a Cashless Society.” Japan Center for
Economic Research, Tokyo.
Iwata, K., I. Samikawa, E. Takahashi, and T.
Kimotsuki. 2016. “Risks from Extending the
QQE policy-Bank of Japan’s JGB Purchases toreach Limits in June 2017.” Japan Center for
Economic Research, Tokyo.
Javorcik, B. 2015. “Does FDI Bring Good Jobs to
Host Countries?” The World Bank Research
Observer 30 (1): 74-94.
Jimenez, E. 1995. “Human and PhysicalInfrastructure: Public Investment and Pricing
Policies in Developing Countries.” In Handbook of
Development Economics 3 (B), edited by J.
Behrman, and T.N. Srinivasan, 2773-2843.
Oxford, U.K.: Elsevier.
Kee, H., and H. Tang. 2015. “Domestic Value inExports: Theory and Firm Evidence from China.”
Policy Research Working Paper 7491, World
Bank, Washington, DC.
Kelly, B., L. Pastor, and P. Veronesi. 2014. “ThePrice of Political Uncertainty: Theory andEvidence from the Option Market.” Working
Paper 19812, National Bureau of Economic
Research, Cambridge, MA.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Kose, M. A., E. Prasad, K. Rogoff, and S. Wei.
2009. “Financial Globalization: A Reappraisal.”
IMF Staff Papers 56 (1): 8-62.
Kose, M. A., and M. Terrones. 2015. Collapse andRevival: Understanding Global Recessions andRecoveries. Washington, DC: International
Monetary Fund.
Lakner, C., and B. Milanovic. 2016. “Global
Income Distribution: From the Fall of the Berlin
Wall to the Great Recession.” World Bank
Economic Review 30 (2): 203-232.
Lakner, C., M. Negre, and E. Prydz. 2014.
“Twinning the Goals: How Can Shared Prosperity
Help to Reduce Global Poverty?” Policy ResearchWorking Paper 7106, World Bank, Washington,DC.
Lane, P., and P. McQuade. 2014. “Domestic
Credit Growth and International Capital Flows.”
Scandinavian Journal of Economics 116 (1): 218–
252.
Lardy, N. R., and Z. Huang. 2016. “China
Private Investment Softens, But Not as Much as
Official Data Suggest.” China Economic Watch,Peterson Institute for International Economics,
Washington, DC.
Laforte, J.-P., and J. Roberts. 2014. “November
2014 Update of the FRB/U.S. Model.” FEDS
Notes, Board of Governors of the Federal Reserve
System, Washington, DC.
Lariau, A., M. El Said, and M. Takebe. 2016. “AnAssessment of the Exchange Rate Pass-Through in
Angola and Nigeria.” Working Paper 16/191,
International Monetary Fund, Washington, DC.

CHAPTER 1

Policy and Leverage.” Working Papers 483, Bankfor International Settlements, Basel, Switzerland.
McKinsey Global Institute. 2016. “Lions on theMove II: Realizing the Potential of Africa’s
Economies.” McKinsey & Company.
Mian, A., A. Sufi, and E. Verner. 2015.
“Household
Debt
andBusiness
Cycle
Worldwide.” Working Paper 21581, National
Bureau of Economic Research, Cambridge, MA.
Milanovic, B. 2016. Global Inequality: A New
Approach for the Age of Globalization. Boston, MA:
Harvard University Press.
Molloy, R., C. Smith, R. Trezzi, and A. Wozniak.
2016. “Understanding Declining Fluidity in the
U.S. Labor Market.” Brookings Papers on
Economic
Activity,
Brookings
Institute,
Washington, DC.
Nicar, S. B. 2015. “International Spillovers from
U.S. Fiscal Policy Shocks.” Open Economies Review
26 (5): 1081-1097.
Niño-Zarazúa, M., L. Roope, and F. Tarp. 2016.
“Global Inequality: Relatively Lower, AbsolutelyHigher.” Review of Income and Wealth (July).
Noland, M., G. Hufbauer, S. Robinson, and T.
Moran. 2016. “Assessing Trade Agendas in the
U.S. Presidential Campaign.” PIIE Briefing 16-6,
Peterson Institute of International Economics,
Washington, DC.
Nunns, J., L. Burman, B. Page, J. Rohaly, and J.
Rose. 2016. “An Analysis of Donald Trump’s
Revised Tax Plan.” Tax Policy Center,
Washington, DC.

Łyziak, T., and M. Paloviita. 2016. “Anchoring of
Inflation Expectations in the Euro Area: Recent
Evidence Based on Survey Data.” Working Paper
1945, European Central Bank, Frankfurt.

OECD (Organisation for Economic Cooperation
and Development). 2015. “Lifting Investment forHigher Sustainable Growth.” In OECD Economic
Outlook, 205-279. Paris: Organisation for
Economic Cooperation and Development.

Masuch, K., E. Moshammer, and B. Pierluigi.
2016. “Institutions and Growth in Europe.”
Working Paper 1963, European Central Bank,
Frankfurt.

________. 2016a. “Cardiac Arrest or Dizzy Spell:
Why is World Trade So Weak and What Can
Policy Do about It?” OECD Economic Policy
Papers 18, Paris, France.

McCauley, N., P. McGuire, and V. Sushko. 2015.
“Global Dollar Credit: Links to U.S. Monetary________. 2016b. “The Economic Consequencesof Brexit: A Taxing Decision.” Economic Policy

53

54

CHAPTER 1

Paper
16,
Organisationfor
Economic
Cooperation and Development, Paris, France.
Proctor, B., J. Semega, and M. Kollar. 2016.
Income and Poverty in the United States: 2015.
Current Population Reports. Washington, DC: U.S.
Census Bureau.
Reinhart, C., and K. Rogoff. 2009. This Time isDifferent: Eight Centuries of Financial Folly.
Princeton: Princeton University Press.
Reinhart, C., V. Reinhart, and C. Trebesch. 2016.
"Global Cycles: Capital Flows, Commodities, andSovereign Defaults, 1815-2015." American
Economic Review 106 (5): 574-80.
Rostagno, M., U. Bindseil, A. Kamps, W. Lemke,
T. Sugo, and T. Vlassopoulos. 2016. “Breaking
through the Zero Line: The ECB’s Negative
Interest Rate Policy.” Presentation at Brookings
Institution seminar “Negative Interest Rates:
Lessons Learned...So Far,” June 6, Washington,
DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Vollrath, D. 2016. “More on Decomposing
U.S. Productivity Growth.” Growth Economics,
May 11.
Whalen, C. and F. Reichling. 2015. “The Fiscal
Multiplier and Economic Policy Analysis in the
United States.” Working Paper Series 2015/02,
Congressional Budget Office, Washington, DC.
Williams, J. 2016. “Monetary Policy in a Low Rstar World.” FRBSF Economic Letter 2016/23,
Federal Reserve Bank of San Francisco.
Woodford, M. 2011. “Simple Analytics of theGovernment Expenditure Multiplier." American
Economic Journal: Macroeconomics 3 (1): 1-35.
World Bank. 1997. “Malaysia - Enterprise
Training, Technology, and Productivity.” WorldBank country study, Washington, DC.
________. 2001. Globalization, Growth, andPoverty: Building an Inclusive World Economy.
Policy Research Report. Washington DC: World
Bank; New York: Oxford University Press.

Sen, P. 1995. “Foreign Direct Investment: A
Solution to BOP Problems?” Economic andPolitical Weekly 30 (30): 1921-927.

________. 2004a. Reforming Infrastructure:
Privatization, Regulation and Competition. Policy
Research Report. Washington DC: World Bank;New York: Oxford University Press.

Shin, H. S. 2016. “Bank Capital and Monetary
Policy Transmission.” Panel remarks at the ECB
and Its Watchers XVII Conference, Center for
Financial Studies, Frankfurt, April 7.

________. 2004b. World Development Report:
Making Services Work for Poor People. Washington
DC: World Bank.

Straub, S. 2008. “Infrastructure and Growth inDeveloping Countries: Recent Advances andResearch Challenges.” Policy Research Working
Paper 4460, World Bank, Washington DC.
Taglioni, D., and D. Winkler. 2016. Making
Global Value Chains Work for Development.
Washington, DC: World Bank.
UNCTAD (United Nations Conference on Tradeand Development). 2014. World Investment Report– Investing in the SGDs: An Action Plan. Geneva,
Switzerland: UNCTAD.
________. 2016. World Investment Report –Investor Nationality: Policy Challenges. Geneva,
Switzerland: UNCTAD.

________. 2008. MENA Development Report: The
Road not Travelled Education Reform in the Middle
East and North Africa. Washington, DC: WorldBank.
________. 2012. The World Bank Group’s
Response to the Global Economic Crisis.
Washington, DC: World Bank.
________. 2013. The Africa Competitiveness Report2013. World Bank: Washington, DC.
________. 2014. Global Monitoring Report
2014/2015: Ending Poverty and Sharing Prosperity.
Washington DC: World Bank.
________. 2015a. Global Economic Prospects:
Having Fiscal Space and Using It. January 2015.
Washington, DC: World Bank.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017________. 2015b. Global Monitoring Report
2015/2016: Development Goals in an Era of
Demographic Change. Washington, DC: WorldBank.
________. 2015c. “World Bank GroupEngagement in Resource-Rich Developing
Countries: The Cases of the Plurinational State of
Bolivia, Kazakhstan, Mongolia, and Zambia.
Clustered Country Program Evaluation Synthesis
Report.” World Bank Group, Washington, DC.
________. 2016a. “Reducing Vulnerabilities.”
East Asia Pacific Economic Update, World Bank,
Washington, DC.
________. 2016b. “Commodity Markets
Outlook: OPEC in Historical Context.” October.
World Bank, Washington, DC.
________. 2016c. “Commodity Markets
Outlook: From Energy Prices to Food Prices:Moving in Tandem.” July. World Bank,
Washington, DC.
________. 2016d. “Russia Economic Report No.
36: The Russian Economy Inches Forward: Will
That Suffice to Turn the Tide?” World Bank,
Washington, DC.
________. 2016e. “Africa’s Pulse.” October 2016.
World Bank, Washington, DC.
________. 2016f. Global Economic Prospects:
Divergences and Risks. June 2016. Washington,
DC: World Bank.
________. 2016g. Global Economic Prospects:
Spillovers amid Weak Growth. January 2016.
Washington, DC: World Bank.
________. 2016h. World Development Report:
Digital Dividends. Washington DC: World Bank.

CHAPTER 1________. 2016i. EU Regular Economic Report
3: Growth, Jobs and Integration: Services to the
Rescue. Washington, DC: World Bank.
________. 2016j. World Development Indicators:
Featuring the Sustainable Development Goals.
Washington, DC: World Bank.
________. 2016k. Poverty and Shared Prosperity
2016: Taking on Inequality. Washington, DC:
World Bank.
World Economic Forum. 2016. “The Human
Capital Report 2016.” Geneva, Switzerland.
WTO (World Trade Organization). 2016a.
“Services Negotiations Gain Momentum as
Members Show Renewed Interest.” WTO Press
Release, July 4.
________. 2016b. “Report on G20 Trade
Measures.” World Trade Organization, Geneva
Switzerland.
Yellen, J. 2016. “Macroeconomic Research after the
Crisis.” Speech at "The Elusive 'Great' Recovery:
Causes and Implications for Future Business Cycle
Dynamics" 60th Annual Economic Conference,sponsored by the Federal Reserve Bank of Boston.
Zhang, L. 2016. “Rebalancing in China—Progress
and Prospects.” Working Paper 16/183,
International Monetary Fund, Washington, DC.
Zidar, O. 2015. “Tax Cuts for Whom?
Heterogeneous Effects of Income Tax Changes on
Growth and Employment.” NBER Working
Paper 21035, National Bureau of Economic
Research, Cambridge, MA.

55

SPECIAL FOCUS
The U.S. Economy and the WorldGLOBAL ECONOMIC PROSPECTS | JANUARY 201759

SPECIAL FOCUS

The U.S. Economy and the World
Developments in the U.S. economy, the world’s largest, have effects far beyond its shores. A surge in U.S. growth—whether
due to expansionary fiscal policies or other reasons—could provide a significant boost to the global economy. Tightening U.S.
financial conditions—whether due to faster-than-expected normalization of U.S. monetary policy or other reasons—could
reverberate across global financial markets, with adverse effects on some emerging market and developing economies(EMDEs) that rely heavily on external financing. In addition, lingering uncertainty about the course of U.S. economic policy
could have a significantly negative effect on global growth prospects. While the United States plays a critical role in the world
economy, activity in the rest of the world is also important for the United States. The new U.S. administration’s specificeconomic policies are still being shaped. By assessing the U.S. economy’s role in the world, the objective of this Special Focus is
to inform the analysis of potential global implications of such policies.

Introduction
Developments in the U.S. economy, because of its
size and international linkages, are bound to havesubstantial implications for the global economy.
The United States is the world’s single largest
economy (at market exchange rates), accounting
for almost 22 percent of global output and over athird of stock market capitalization (Figures SF.1
and SF.2). It is prominent in virtually every global
market, with about one-tenth of global tradeflows, one-fifth of global FDI stock, close to onefifth of remittances, and one-fifth of global energy
demand. Since the U.S. dollar is the most widelyused currency in global trade and financialtransactions, changes in U.S. monetary policy andinvestor sentiment play a major role in driving
global financing conditions.

FIGURE SF.1 United States in the global economy
The U.S. economy is the world’s largest, accounting for almost one quarterof global GDP and one-tenth of global trade.
A. Size of major economies, 2010-15

B. Size in global trade, 2010-15

Percent of total
United States

Percent of total
40

50

China

Germany

Japan

40

30

30
20

20
10

10

0
GDP (market
exchange
rates)GDP (PPP)

Population0
Trade

Note: This Special Focus was prepared by M. Ayhan Kose, Csilla
Lakatos, Franziska Ohnsorge, and Marc Stocker, and with
contributions from Carlos Arteta, John Baffes, Jongrim Ha, Raju
Huidrom, Ergys Islamaj, Ezgi O. Ozturk, Hideaki Matsuoka,
Naotaka Sugawara, and Temel Taskin. Xinghao Gong, Trang
Nguyen, and Peter Williams provided research assistance.

Imports

D. U.S. trade openness over time

Percent of total
60 United States

Percent of GDP
35
1980s

China

Germany

Japan

2010-15

30

40

25

20

20

GDP (PPP)

2010-151980s

2010-151980s

2010-151980s

GDP (market
exchange
rates)

Trade

15
10
5
0
Exports

Imports

Trade

Percent of regional GDP
7
6
5

Transport
equipment
Electronicequipment

Textiles4

Chemicals

Iron and steel

Percent of world imports
20
16
12
8
4
0

Fuels andmining products

F. Exports to the United States,
2010-15

Food

E. U.S. share of global imports,
2010-15

Agricultural
products

This Special Focus examines the role of the UnitedStates in the global economy and the two-way

Exports

C. GDP and trade size over time0

At the same time, the global economy isimportant for the United States. Affiliates of U.S.
multinationals operating abroad and affiliates offoreign companies located in the United Statesaccount for a sizable share of output, employment,
cross-border trade and financial flows. One-sixthof consumer goods purchases by U.S. consumers
are for imported goods, with an even higher sharein cars and consumer electronics.

United States
China
Germany
Japan

3
2
1
0
EAP

ECA

LAC

MNA

SAR

SSA

Sources: World Bank, International Monetary Fund, UN Population Statistics.
A.C. “PPP” stands for purchasing power parity exchange rates.
B.D. Trade is the sum of exports and imports of goods.
E. Goods imports.
F. “EAP” stands for East Asia and Pacific; “ECA” stands for Europe and Central Asia; “LAC” stands
for Latin America and the Caribbean; “MNA” stands for Middle East and North Africa; “SAR” stands
for South Asia; and “SSA” stands for Sub-Saharan Africa.

60

SPECIAL FOCUS

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE SF.2 United States in global financial markets
The United States is the single largest international creditor and debtor,
and U.S. financial markets are highly integrated with global markets. The
U.S. dollar is the most widely used currency in global trade and financialtransactions.
A. Financial market size, 2010-15

B. U.S. financial openness, 2010-14

Percent of total
United States

Percent of GDP
350
1980s

60

China

Germany

Japan

2010-14

300

50

250

40

200

30

150

20

100

10

50

0
AssetsLiabilities

ForeignclaimsStock market
capitalization

0
AssetsLiabilities

Total

C. Share of U.S. dollar-denominatedtransactions in financial markets, 2016

D. Capital investment by the UnitedStates, 2010-15

Percent
100

Percent of regional GDP
25

US$

Euro

Yen

Other

80

20

60

15

Linkages between the
United States and the World

10

40

5

20

0

0
Currency

Bank lending Bond issuance

EAP

ECA

LAC

may be pursued by the new U.S. administration.1
The incoming administration has signaled its
intention to pursue more expansionary fiscal
policies, which could lead to stronger growth in
the short-term. It has also promised a change indirection in trade policies. In designing thesepolicies, the challenge will be to generate domestic
benefits while containing potentially adverse
feedbacks from their global repercussions. Whiledetailed plans are still being worked out, an
understanding of the role of the U.S. economy in
the global economy can inform the analysis ofpotential global implications of likely policies. In
light of the answers to the four questions above,some preliminary implications are sketched out inthe concluding section of this Special Focus.

MNA

SAR

SSA

Sources: World Bank, Lane and Milesi-Ferretti (2007), Bank for International Settlements,
International Monetary Fund, World Federation of Exchange.
A. Foreign claims are consolidated foreign claims of BIS-reporting banks headquartered in respective
countries or locations (data unavailable for China). Assets and liabilities are international investment
positions. Average share for 2010-15, except for assets and liabilities (2010-14).
B. Total is the sum of assets and liabilities. Average shares in GDP over the periods of 1980-89 and2010-14.
C. For currency, totals sum to 100 percent because each foreign exchange transaction involves two
different currencies. “Euro” includes all legacy currencies of the Euro as well as the European
Currency Unit. Data for the center and right bars are for June 2016.
D. Capital investment refers to stocks of foreign direct investment (FDI), portfolio investment, andcross-border bank lending from the United States to EMDE regions. Country coverage varies bycapital investment component. As FDI data are not available for 2015, data up to 2014 are used for
FDI.

interactions between the U.S. economy and othereconomies by addressing the following questions:•

How important are linkages between the U.S.
economy and the world?

•

How synchronous are business cycles in the
United States and other economies?

•

How large are global spillovers from shocks
originating in the United States?

•

How important is the global economy for theUnited States?

Much attention has focused on the domestic andglobal implications of the economic policies that

With an estimated nominal GDP of more than
$18 trillion in 2016, the United States is theworld’s single largest economy and has the world’s
third largest population. It accounts for more than
22 percent of global GDP (at 2015 market
exchange rates), 11 percent of global trade, 12
percent of bank foreign claims, and 35 percent of
global stock market capitalization (Figures SF.1
and SF.2).2 The U.S. share of global output andtrade has remained broadly stable since the 1980s,
whereas the share of other major advanced
economies has declined gradually. The UnitedStates is the single largest international creditor
and debtor: it holds the largest stock of foreign
assets and liabilities and, by a wide margin, thelargest net foreign asset position (updated andextended version of dataset constructed by Lane
and Milesi-Ferretti 2007).
U.S. trade and financial integration with otheradvanced economies and EMDEs—especially in
Latin America and the Caribbean (Figure SF.3)—
1Early assessments have emphasized the need for additional details
and challenges for policy, see Blanchard (2016); Bown (2016);
Constancio (2016); Chandy and Seidel (2016); Spence (2016).
2At purchasing power exchange rates, the United States is theworld’s second largest economy with about 16 percent of global GDP
in 2015. China is the world’s largest, accounting for 17 percent of
global GDP.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

The United States is a particularly large trading partner and source offinance for Latin America and the Caribbean, and East Asia and thePacific. Portfolio and remittance inflows from the United States areimportant for most EMDE regions.
A. East Asia and Pacific

C. Latin America and the Caribbean
Percent of total
United States

China

GermanyJapan

The growth of trade linkages between the UnitedStates and other countries has taken place in an
era of trade liberalization. Since 1948, the General
Agreement on Trade and Tariffs (GATT) and,since 1995, the World Trade Organization(WTO) have provided a multilateral framework
for this process. The majority of U.S. trade isconducted under the Most Favored Nation(MFN) regime, with average tariffs at 3.5 percent

GermanyJapan

Foreign claims

D. Middle East and North Africa
Percent of total
United States

30

60

China

Portfolio
liabilities

0

Foreign claims

100

Portfolio
liabilities

20

10
Remittances
inflows

30

20

China

Germany

Japan

20

E. South Asia
Percent of total
United States
40

Foreign claims

Portfolio
liabilities

Remittances
inflows

F. Sub-Saharan Africa
China

GermanyJapan

Percent of total
United States

China

Germany

Japan

50
40

30

30
20

10

Foreign claims

Portfolio
liabilities

Remittances
inflows

Inward FDI

0

Exports

Foreign claims

Portfolio
liabilities

Remittances
inflows

Inward FDI

10
Exports0

Inward FDI

Foreign claims

Portfolio
liabilities

Remittances
inflows0

Inward FDI

100

Exports

20

Exports

40

20

The United States is the single largest export
destination for one-fifth of the world’s countries.
It is the largest export market for more than halfof the EMDEs in Latin America and the
Caribbean, and South Asia, and the primaryexport market for several countries in other
EMDE regions, especially in East Asia Pacific.
Mexico, Colombia, Ecuador and many smaller
Central American EMDEs rely particularly heavily
on exports to the United States.

Percent of total
United States
40

Remittances
inflows

Japan

Inward FDI

Germany

30

80

Manufactured goods account for more than threequarters of U.S. goods imports, with oil imports
making up most of the remainder despite a steadydecline since 2000. The most prominent imported
manufacturing categories are motor vehicles, dataprocessing machines, and drugs. More than twothirds of U.S. manufacturing imports originate
from China (24 percent of imports), the European
Union (20 percent of imports), Mexico andCanada (combined 24 percent of imports).

China

B. Europe and Central Asia

Exports

Percent of total
United States
40

Inward FDI

Trade links. Trade accounted for 30 percent of
U.S. GDP in 2015, considerably less than the
average for other advanced economies (70 percent)but almost twice as much as in the 1980s (18percent). The United States is the world’s single
largest importer and exporter of goods andservices, and the largest exporter and importer ofbusiness services (Figure SF.4). It accounts for 14
percent of global goods imports and 9 percent of
global services imports.

FIGURE SF.3 Linkages between the United States and
EMDE regions

Exports

runs deep. Countries whose trade and financial
ties are predominantly with the United States are
directly exposed to U.S. developments. In
addition, those that are in general highly open to
global trade and finance are indirectly exposed
because of widespread spillovers from the UnitedStates.

61

SPECIAL FOCUS

Sources: World Integrated Trade Statistics, Bank for International Settlements, International Monetary
Fund, World Bank.
Notes: Averages for 2010-15, except for FDI (2010-14 average). In percent of total exports of each
EMDE region, total inward FDI stocks in each EMDE region, total portfolio liabilities (derived fromcreditor data) in each EMDE region, total foreign claims of BIS-reporting banks on each EMDE
region, and total remittance flows to each region.

(5.2 percent for agricultural products). In addition
to multilateral agreements, the United States has
negotiated 14 bilateral or regional trade
agreements with 20 partner countries, which cover
32 percent of its imports of goods and services(Jackson 2016).3 The largest of these agreements is
3For discussions of the implications of the NAFTA and CAFTADR, see De Hoyos and Iacovone (2013); Kose, Meredith and Towe(2005); Kose, Rebucci and Schipke (2005); Lederman, Maloney, andServen (2004); and Romalis (2007).

62

SPECIAL FOCUS

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE SF.4 U.S. trade flows: Composition andpartners
The U.S. is the single largest country destination of global exports of goods
and services. It is a key market for the LAC region as well as for some
EMDEs in East Asia. Electronic and transport equipment account for thebulk of U.S. manufacturing imports and are mostly imported from other
NAFTA members, European Union countries, and China.
A. U.S. share of global goods andservices trade
United States
Germany

Percent of total
40

B. Composition of U.S. exports andimports

China
Japan

Percent of total
100
80
60
40
20
0

30
20
10

Exports
EnergyTransport
Machinery

Goods

Services

Total

Goods

Total

Services0

Exports

Imports Exports Imports
Electronics
Goods
ChemicalsServices
Other

Imports

C. Main sources of U.S. imports

D. Exports destinations of EMDE
regions

Percent of total

Percent of total
United States
70

China
Japan
Mexico+Canada

United Kingdom
Euro Area
Other

China

Other AE

60

100
80
60
40
20
0

50
40
30

EnergyTransport
Equipment

Machinery

Electrical
Equipment

20
10
0
EAP

ECA

LAC

MNA

SAR

SSA

E. Selected EMDEs: Exports to theUnited States

F. Share of EMDEs for which UnitedStates is a major export destination

Percent
30

Percent of GDP

25

Percent of total (RHS)

Percent of EMDEs
Largest export share with the United States
60
30% or more of exports with the United
50
States
40

15
10

India

Peru

Sri Lanka

China

Colombia

Thailand

Malaysia

Mexico0Vietnam5

Percent
80
70
60
50
40
30
20
10
0
Indonesia

20

the North American Free Trade Agreement(NAFTA), in force since 1994. The United States
also grants unilateral preferences to a number of
EMDEs through it Generalized System ofPreferences (GSP) and African Growth
Opportunity Act (AGOA) which cover about 3.3
percent of U.S. imports (Frazer and Biesebroek
2008; Mattoo, Roy, and Subramaniam 2003;
Cooper 2014).

30
20
10
0
EAP

ECA

LAC

MNA

SAR

SSA

Sources: World Trade Organization, World Integrated Trade Statistics, Bureau of Economic Analysis,
IMF, World Bank.
Note: Averages for 2010-15 unless otherwise specified.
A. U.S. imports of goods and services in percent of global goods and services imports.
B. U.S. imports of goods or services in percent of total U.S. imports of goods and services (purplebars); U.S. imports in each sector in percent of total U.S. goods imports (other bars);. “Energy”
includes energy-related products, metals and minerals; “Electronics” stands for electronic products;“Chemicals” stands for chemicals and related products; “Transport” stands for transportationequipment; “Other” includes agricultural and forestry products, textiles, apparel, and footwear.
Averages for 2010-2014.
C. Sectoral exports from European Union, China, Japan, and other economies to the United States inpercent of total U.S. imports in each sector.
D. Exports to the United States, other advanced economies, and China in percent of total exports ofeach EMDE region. “AE” stands for advanced economies.
E. Exports to the United States in percent of total exports or in percent of GDP of each EMDE
economy.
F. Share of EMDE economies in each region for which exports to the United States account for the
single largest share of total exports or for which exports to the United States account for at least 30
percent of total exports.

Financial links. The U.S. financial markets arehighly integrated with global markets. Following a
rapid expansion over three decades, by 2010-14,
its international assets and liabilities were on
average three times GDP, broadly in line with thatof other advanced economies (Figure SF.2). The
United States remains the world’s largest source
and recipient of foreign direct investment (FDI)
flows, accounting for about one-fourth of world
FDI inflows and outflows in 2015. The European
Union (EU), Japan, Canada and Switzerland
together hold about 90 percent of FDI assets in
the United States, while the EU and Canada are
the largest recipients of U.S. FDI. The countries of
the Latin America and Caribbean region are themost exposed to FDI inflows originating in the
United States, in particular, Brazil, Chile, andMexico (Figure SF.5). Reflecting the size anddepth of its financial markets, the United Statesaccounts for the largest share of portfolio assets in
one-third of EMDEs.
The U.S. dollar is the most widely used currency
in international trade and financial markets and is
the world’s preeminent reserve currency. Around
80 percent of EMDE bond issuance and morethan 50 percent of cross-border bank flows to
EMDEs are denominated in U.S. dollars. Europe
and Central Asia is the only EMDE region where
the U.S. dollar is surpassed—by the euro—as thecurrency of denomination for cross-border bankflows. Ecuador, El Salvador, and Panama use theU.S. dollar as their official currency; more than 30
other EMDEs maintain exchange rate pegs against
the U.S. dollar. A large share of official foreignexchange reserves (63 percent) are dollardenominated. The U.S. dollar is widely used ininternational trade transactions for current
account transactions, accounting for about onethird of invoicing for goods and services in Europe

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Because of its large financial system and economy, the United States is an
important source of FDI, portfolio flows, remittances and bank lending to
EMDEs across the world.
A. FDI inflows from the United States

B. Portfolio inflows from the UnitedStatesPercent
14
12
10
8
6
4
2
0

Percent
25

Historically, the United States has been a major
consumer of agricultural, energy, and metalcommodities. With the rise of large EMDEs, suchas China and India, this role has diminished overtime (World Bank 2015a). However, the UnitedStates is still the largest consumer of natural gas
and oil, accounting for more than one-fifth ofglobal consumption. It is the second largest
consumer of a wide range of commodities,
including aluminum, copper, lead, and coffee.

Synchronization of U.S.
and global cycles
Synchronization of business cycles. Businesscycles in the United States, other advanced
economies and EMDEs have been highly

15
10

India

Indonesia

ThailandPhilippines

Chile

MexicoMalaysia

0

Hungary

5

Ukraine20

South Africa

Philippines

Percent
80
70
60
50
40
30
20
10
0

Percent of GDP
Percent of total (RHS)

C. Cross-border bank claims of U.S.
banks on selected EMDEs

D. Remittance inflows from the UnitedStatesPercent
10

Percent
5

80
60

2

40

ThailandUkraineColombia

Ethiopia

Pakistan

0

India

20

0

Nigeria1
Nepal

South Africa

Colombia

BrazilPhilippines

India

Chile

MexicoMalaysia

0

Hungary2

100

3

Mexico4

Percent
120

Percent of GDP
Percent of total (RHS)

4

Philippines

8

TurkeyPercent
40
35
30
25
20
15
10
5
0

Percent of GDP
Percent of total (RHS)

6

The United States is also the world’s largest biofuel
producer, accounting for 42 percent of global
production, and one-third of U.S. maize
production. Rapid growth in maize-based
production was encouraged by the Renewable FuelStandard (RFS), mandated by the Energy Policy
Act of 2005 and the Energy Independence andSecurity Act of 2007, which requires
transportation fuel sold in the United States tocontain a minimum volume of renewable fuels.

Percent
80
70
60
50
40
30
20
10
0
South Africa

BrazilPolandThailandHungary

Malaysia

Percent of GDP
Percent of total (RHS)

Kazakhstan

Chile

Commodity market links. The United States is alarge producer and consumer of commodities(Figure SF.6). For example, it has re-emerged as
the largest producer of oil and natural gas inrecent years, accounting for 13 percent of global
oil production (similar to its share in the early
1990s). U.S. production is almost evenly split
between natural gas and petroleum, in contrast to
the predominantly petroleum-based production ofother major hydrocarbon producers such as Russia
and Saudi Arabia (EIA 2016). U.S. shale oil
production, which tripled during 2009-14,
requires little capital investment and can bebrought onstream rapidly; hence, it has become ahighly flexible source of global oil supply,
responding quickly to price changes (Baffes et al.
2015).

FIGURE SF.5 U.S. financial flows: Composition andpartners

Mexicoand two-thirds in Asia (Goldberg and Tille 2008,2016; Devereux and Shi 2013).

63

SPECIAL FOCUS

Sources: Bank for International Settlements, International Monetary Fund, World Bank.
A. Share of FDI inflows from United States in total FDI inflows into (and in percent of GDP of) each
EMDE region, average of 2010-2014.
B. Share of portfolio investment from United States in total portfolio inflows into (and in percent of
GDP of) each EMDE region, average of 2010-2015.
C. Share of consolidated U.S.-headquartered BIS-reporting banks’ claims on each EMDE region in
total consolidated BIS-reporting banks’ claims on (and in percent of GDP of) each EMDE region,
average of 2010-2015.
D. Share of remittances inflows from United States in total remittances inflows into (and in percent of
GDP of) each EMDE region, average of 2010-2015.

synchronous (Figure SF.7). This is partly areflection of the strength of global trade andfinancial linkages of the U.S. economy with therest of the world. In addition, it is because of
global shocks that had a common effect on many
countries at the same time. Business cycles in the
United States are somewhat more correlated withthose in other advanced economies than those in
EMDEs (with the important exception of Mexico)
because of deeper economic integration.
Concordance of cyclical turning points.
International business cycle synchronization tends
to be particularly strong when the U.S. economy
is in recession but, over the phases of the U.S.
business cycle, GDP growth in the rest of theworld correlates substantially. For example,

64

SPECIAL FOCUS

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE SF.6 The U.S. economy and commodity markets
The United States accounts for more than one-fifth of global consumptionof oil and natural gas. It is the largest producer of oil and natural gas.
A. U.S. share of global consumption,
2015

B. U.S. share of global production,
2015

Percent

Percent

CottonEdible oils
GrainsNatural gas
Oil
Coal
Iron ore
Tin
Lead
Zinc
NickelCopperAluminum

CottonEdible oils
GrainsNatural gas
Oil
Coal
Iron ore
Tin
Lead
Zinc
NickelCopperAluminum

0

10

20

30

0

10

20

30

C. U.S. share of global crude oil
consumption and production

D. Oil and gas production, 2015

Percent of world total
30
Production

Quadrillion Btu per day
60
Oil
Natural gas

Consumption

25
20

40

15
10

20

5

2015Q1

2013Q1

2011Q1

2009Q1

2007Q1

2005Q1

2003Q1

2001Q1

1999Q1

1997Q1

1995Q1

1993Q1

1991Q1

0

0
U.S. RussiaSaudi U.S. RussiaSaudi U.S. RussiaSaudi
ArabiaArabiaArabia
1990

2008

2015

Sources: Haver Analytics, World Bank, BP Statistical Review of World Energy Efficiency, U.S. Energy
Information Administration.
A.B. Data for metals represent refined consumption and production. Iron ore consumption isestimated with crude steel production. Grains include wheat, maize and rice; edible oils include
coconut oil, cottonseed oil, palm oil, palm kernel oil, peanut oil, rapeseed oil and soybean oil. Oil
includes inland demand plus international aviation and marine bunkers and refinery fuel and loss.
Coal includes commercial solid fuels only, i.e., bituminous coal, anthracite, lignite and brown coal,and other commercial solid fuels. Natural gas excludes natural gas converted to liquid fuels but
includes derivatives of coal as well as natural gas consumed in gas-to-liquids transformation.
D. Oil and natural gas production in British thermal units (Btu), assuming that 1 barrel of crude oil isequivalent to 5,729,000 Btu and 1 cubic foot of natural gas is equivalent to 1,032 Btu.

growth was on average higher in other advanced
economies and EMDEs during periods of U.S.
expansions than it was when the U.S. economy
was in recession. More importantly, although thefour recessions the global economy experienced
since 1960 (1975, 1982, 1991, and 2009) were
driven by a host of problems in many corners of
the world, they all overlapped with severerecessions in the United States.4
The global recession of 1975 coincided with the
beginning of a prolonged period of stagflation,
4Global recessions are contractions in inflation-adjusted output percapita accompanied by broad, synchronized declines in various othermeasures, such as world industrial production, employment, tradeand capital flows, and energy consumption (Kose and Terrones2015).

with low output growth and high inflation in the
United States. During the 1982 recession, theUnited States and several other advanced
economies experienced a sharp decline in activity
along with a steep increase in unemployment in
the wake of anti-inflationary monetary policies.
The economy again went into recession in July
1990 following a period of depressed activity inthe housing market and a credit crunch. The deep
global recession of 2009 was driven by the global
financial crisis, which had its origins in the U.S.
mortgage market but turned into a truly global
crisis after the collapse of Lehman Brothers in
September 2008. These four U.S. recessions
coincided with global recessions; there were,
however, four other U.S. recessions post-1960 that
did not.
An event study of the last two U.S. recessions, in2001 and 2009, illustrates the concordance of theturning points of the U.S. business cycle withthose of other advanced economies and EMDEs(Figure SF.7).5 The 2009 recession was particularly
severe for the United States whereas the U.S.
economy experienced a mild recession in 2001
following the burst of the “dot com” bubble of thelate 1990s. In the four quarters leading up to thelast two U.S. business cycle troughs, otheradvanced economies also experienced a decline in
the cyclical component of their GDP of,respectively, 0.5 and 4 percent, while theirsubsequent recoveries have been sluggish. Among
EMDEs, slower activity was also observed around
U.S. cyclical troughs.
Concordance statistics illustrate the degree ofsynchronization between the phases of the U.S.
business and financial cycles and those of othereconomies. Business cycles are more highly
synchronized than financial cycles: other countries
tend to be in the same business cycle phase with
the U.S. cycle roughly 80 percent of the time.
While the degree of synchronization of financial
cycles with the U.S. financial cycle is lower thanthat of business cycles, they are quite often in thesame phase—about sixty percent of the time for
5Two U.S. business cycle peaks (March 2001 and December 2007)
and two U.S. business cycle troughs (November 2001 and June 2009)
are identified since 2000 by the NBER’s Business Cycle Dating
Committee.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Independently of growth, policy, or financial
market developments in the United States, shocks
to confidence of U.S. businesses and consumers
can themselves reverberate across borders and be
sources of business cycle fluctuations (Levchenko
and Pandalai-Nayar 2015). Elevated uncertainty
about changes in U.S. policies can reduce
incentives to commit to capital investment athome and abroad, and this in turn could adversely
affect long-term global growth prospects (Koseand Terrones 2015).
6For a detailed analysis of the intensity of business cycle linkages
between the United States and other countries, see Dai (2014); Dées
and Vansteenkiste (2007); Canova (2005); Stock and Watson (2005);
Kose (2003); Kose, Prasad, and Terrones (2004); Jansen andStokman (2004); Eckmeier (2006); IMF (2007); and Roache (2008).

A. Cyclical component of GDP

B. Growth during U.S. businesscycles, 1960-2015

Percent
4
3
2
1
0
-1
-2
-3
-4

Percent
4

US Other AEs EMDEs BRICS

United States

Other AEs

EMDEs

3
2
1
0

2016

2014

2012

2010

2008

2006

-1

2004

Developments in the U.S. economy havesignificant impacts on the global economy. Shocks
to the U.S. economy transmit to the rest of theworld through the wide range of channels
discussed above. An acceleration in U.S. activity
can lift growth in its trading partners directly,
through an increase in import demand, andindirectly, by strengthening productivity spillovers
embedded in trade.6 Given its sizable role in global
commodity markets, an acceleration in U.S.
activity tends to lift global commodity demand
and raise prices. This supports activity and eases
balance of payments pressures in commodity
exporters. Financial market developments in the
United States may have even wider global
implications. Fiscal stimulus in the United States
could therefore be expected to boost domestic
activity and generate cross-border spillovers
through real and financial channels.

Business cycles have been highly synchronized between the UnitedStates, other advanced economies, and EMDEs. Business cycles in the
United States and the world are somewhat more synchronized thanfinancial cycles.

2002

Spillovers from the UnitedStates to the global
economyFIGURE SF.7 Synchronization of business and financial
cycles2000

credit, housing, and equity price cycles (FigureSF.7). While it is difficult to establish empiricallywhether the U.S. economy leads business andfinancial cycle turning points in other major
economies, recent research indicates that theUnited States appears to influence the timing andduration of recessions in a number of other major
economies (Francis, Owyang, and Soques 2015).

65

SPECIAL FOCUS-2
U.S. expansions

U.S. recessions

C. Correlations with U.S. businesscyclesD. Concordance with U.S. businessand financial cycles

Correlation
0.8

Percent of total
100

2001Q1-2007Q4
2007Q4-2016Q3

80
0.6

60
40

0.4

20
0.2

0
Business
cycles

0.0
AEs

EMDEs

Creditcycles

BRICS

House
price
cyclesEquitypricecyclesE. Activity around the U.S. recessionof 2001

F. Activity around the U.S. recessionof 2009

Percent deviation from trend GDP
3
AEs
EMDEs
2

Percent deviation from trend GDP
3
AEs
EMDEs
2

1

1

0

0

-1

-1

-2

-2

-3

-3
-4

-3

-2

-1

0
1
Quarters

2

3

4

-4

-3

-2

-1

0
1
Quarters

234Sources: Haver Analytics, World Bank, Kose and Terrones (2015), International Monetary Fund.
A. Cyclical component is defined as deviation from Hodrick-Prescott-filtered trend.
B. Annual average per capita growth rates in purchasing power parity during years of expansions andrecessions in the United States. Years of expansions and recessions are defined as those with annual
positive and negative GDP per capita purchasing power parity growth in the United States,
respectively. Other AEs exclude the United States.
C. Contemporaneous correlations between cyclical component of U.S. real GDP and cyclicalcomponent of real GDP of advanced economies and EMDEs.
D. Average share of years in which business cycles in the United States and all economies were in
the same phase. A higher share suggests more synchronization between two countries.
E.F. The graph shows cyclical component of GDP measured as the deviation from trend GDP
computed using a Hodrick-Prescott filter on seasonally adjusted quarterly GDP around a trough in
U.S. business cycle (t = 0) indicated by the solid bar. Troughs are 2001Q4 and 2009 Q2, defined by
the National Bureau of Economic Research. The line refers to median of 35 advanced economies and
51 EMDEs.

66

SPECIAL FOCUS

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE SF.8 Spillovers from U.S. growth shocks
A 1 percentage point increase in U.S. growth could lift global growth byabout 0.7 percentage points over the following year.
A. Output growth in other advanced
economies

B. Output growth in EMDEs

Percentage point
2.0

Percentage point
2.0

1.5

1.5

1.0

1.0

0.5

0.5
0.0

0.0
On Impact

1 Year

2 Years

On Impact

1 Year

2 Years

Sources: World Bank; Haver Analytics; OECD.
Notes: See Annex SF.1A for details on the methodology.

Growth spillovers. U.S. growth shocks generally
have sizable effects on activity in the rest of theworld. A 1 percentage point increase in U.S.
growth could lift growth in advanced economies
by 0.8 percentage point and in EMDEs by 0.6
percentage points after one year, while global
growth could rise by 0.7 percentage point (FigureSF.8).7 The impact on investment in these
economies would be approximately twice as large.
NAFTA members (Canada and Mexico) would
particularly benefit from trade spillovers (Yifan
and Abeysinghe 2016). Terms of trade effects
through commodity markets would be anothertransmission channel (World Bank 2016c).
Financial market spillovers. The role of theUnited States in global financial markets goes wellbeyond direct capital flows to and from theUnited States.8 U.S. bond and equity markets are
the largest and most liquid in the world. Swings in
U.S. sovereign bond yields are often closely
mirrored in the Euro Area and other large
financial markets. Similarly, cross-border spillovers
from U.S. equity markets are large and depend
more on openness to the global economy than on
the size of actual bilateral portfolio flows
7This estimate for advanced economies is in line with otherestimates for Canada (Swiston and Bayoumi 2008). For Mexico andCaribbean economies with strong economic ties to the United States,considerably larger spillovers in excess of 1 percentage point havebeen estimated (Sun and Samuel 2009; Swiston and Bayoumi 2008).
8See Berkmen et al. (2012); de Grauwe and Yi (2015); Frankel andSaravelos (2012); Helbling et al. (2011); Metiu, Björn, and Grill(2015).

(Ehrmann, Fratzscher, and Rigobon 2011; Roseand Spiegel 2011). This makes U.S. monetary
policy and investor confidence an important driverof global financial conditions (Ehrmann and
Fratzscher 2009; Arteta et al. 2015; Rey 2015).
Because of its predominant use in global trade andfinancial transactions, broad-based U.S. dollar
exchangerate
movements
have
globalimplications. Episodes of U.S. dollar appreciation
tend to coincide with bank deleveraging, tighter
global financial conditions, greater incidence offinancial crises and subdued EMDE growth.9
Although the share of private and public debt
denominated in foreign currency has declined
since the 1990s, the exposure of some EMDEs toforeign currency movements is still high, especiallyin commodity exporters, as well as importers thathave received large capital inflows after the global
financial crisis (Arteta et al. 2016). If the U.S.
dollar goes through a period of significant
appreciation, previous experience indicates that
EMDEs with substantial short-term dollardenominated debt could become vulnerable torollover and interest rate risks and to a drying up
of foreign exchange liquidity.10
Monetary policy spillovers. Changes in U.S.
monetary policy have sizable cross-border effects
through their impact on domestic activity andglobal financial markets, including currency andasset markets. Since the global financial crisis,
highly accommodative monetary policies inadvanced countries have coincided with anacceleration in capital inflows to EMDEs. In turn,higher U.S. interest rates could reduce such flows,
especially those intermediated by banks, and pushup global interest rates.11
Although actual or expected changes in U.S.
monetary policy have significant impacts on U.S.
and global long-term yields, the implications for
EMDEs would likely depend on underlying
9See Bruno and Shin (2015a and b); IMF (2015a and b); Druck,
Magud, and Mariscal (2015); Abbate et al. (2016).
10See Chow et al. (2015); Chui, Fender, and Sushko (2014);
McCauley, McGuire, and Sushko (2015).
11See Ammer et al. (2016); Glick and Leduc (2015); Georgiadis(2015); Borio and Zhu (2012); Bowman, Londono, and Sapriza(2015); Bruno and Shin (2015); Neely (2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

drivers. For example, if a rise in long-term U.S.
yields is supported by prospects of a strengthening
U.S. economy (a favorable “real shock”), the net
effect for EMDEs could be positive (Figure SF.9).
In particular, it could bolster equity valuations andactivity, and lead to less pronounced currencypressures. Alternatively, if financial markets are
surprised by prospects of a less accommodative
stance of U.S. monetary policy, one that is notsupported by strengthening growth, this could
have adverse consequences for EMDEs throughasset price and capital flow channels (an adverse“monetary shock”). Financial stress associated withsuch a change could combine with domestic
fragilities and increase the risks of sudden stops tocapital inflows to more vulnerable EMDEs.

SPECIAL FOCUS

FIGURE SF.9 Spillovers from U.S. interest rate shocks to
EMDEs
An increase in U.S. long-term yields supported by a stronger U.S.
economy (real shock) could lift EMDE equity prices and industrial
production. In contrast, an increase in yields driven by a suddenreassessment of monetary policy expectations (monetary shock) could
have a sizable adverse effect on EMDE equity markets, exchange rates,industrial production, and capital flows.
A. Impact of rising U.S. long-termyields on EMDE equity prices

B. Impact of rising U.S. long-termyields on EMDE industrial production

Percent

Percent
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4

Monetary

Fiscal policy spillovers. U.S. fiscal policy stimulus
could generate international spillovers by raising
U.S. demand for imports from abroad or bycausing exchange rate pressures. Simulations using
the Federal Reserve Board’s model (FRB/US)
suggest that a fiscal stimulus of 1 percent of GDP
could be expected to raise GDP by between 0.7
and 1.5 percent after two years. However, theeffectiveness of fiscal stimulus in lifting U.S.
growth depends critically on the circumstances of
its implementation. Fiscal multipliers—the
additional output generated by an additional U.S.
dollar of government deficit—depend on thepresence of economic slack, the reaction ofmonetary policy, and the nature of the fiscal
measures (Laforte and Roberts 2014; Brayton,
Laubach, and Reifschneider 2014; Whalen andReichling 2015).

Real

5
4
3
2
1
0
-1
-2
-3
-4
Monetary

The ultimate impact on capital flows of
unexpected U.S. monetary policy tightening(beyond one warranted by strengthening U.S.
activity) would also depend on policy actions ofother major central banks. Effects would be
amplified if it coincided with rate increases byother major central banks or would be dampened
if it coincided with rate cuts elsewhere. A 100
basis point increase in long-term U.S. bond yields
could reduce capital flows to EMDEs by 20-45
percent, with the upper bound of this range
reflecting simultaneous interest rate increases byother major central banks and the lower boundreflecting unchanged monetary policy elsewhere.

67

Real

C. Impact of rising U.S. long-termyields on EMDE real exchange rate
Percent
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6

Monetary

RealD. Impact of interest rate shock infour major economies on EMDE
capital flows
Percent of GDP, deviation from baseline
0

-1

-2

-3
t
MonetaryRealt+4
Quarters

Sources: Haver Analytics, Bloomberg, World Bank estimates.
Notes: See Annex SF.1B for details on the methodology.

In addition to this demand effect, fiscal stimulus
in the United States could generate currencypressures, with financial stability implications for
EMDEs. In particular, fiscal stimulus could cause
dollar appreciation, at least in the short run. This
could eventually lift exports of U.S. trading
partners because of improved competitiveness.
However, in the short-term, it might trigger
financial stability concerns in economies withelevated U.S.-dollar denominated liabilities.
Empirical evidence of the impact of U.S. fiscal
policy on the strength of the U.S. dollar is mixed,
however.12 In addition, if U.S. fiscal stimulus leads
to a higher level of U.S. public debt in the longterm, this could cause an increase in global interest
12See Enders, Müller, and Scholl (2011); Ravn, Schmitt-Grohé,and Uribe (2012); and Corsetti, Meier, and Müller (2012); Forni andGambetti (2016); and Auerbach and Gorodnichenko (2016).

t+8

68

SPECIAL FOCUS

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE SF.10 Spillovers from U.S. uncertainty shocks
to EMDEs

The impact on other advanced economies would
be broadly comparable.

A sustained increase in financial market volatility or policy uncertainty in the
United States would significantly slow U.S. growth, as well as output andinvestment growth in other AEs and EMDEs.

Financial market volatility does not necessarily
coincide with policy uncertainty, yet both appear
to be detrimental to investment. Policy
uncertainty is measured by the Economic Policy
Uncertainty Index (EPU), a news-based measureof policy uncertainty (Baker, Bloom and Davies2013). A sustained 10 percent increase in theindex of U.S. EPU could, after one year, reduce
U.S. output growth by about 0.15 percentage
point, EMDE output growth by 0.2 percentage
point, and EMDE investment growth by 0.6
percentage point (Figure SF.10).

A. Impact of 10-percent rise in VIX on
output growth

B. Impact of 10-percent rise in VIX on
investment growth

Percentage point
0.0
16-84 percent confidence bands

Percentage point
0.0
16-84 percent confidence bands-0.1

MedianMedian

-0.3

-0.2

-0.6

-0.3

-0.9
-1.2

-0.4
U.S.

AEs

EMDEs

U.S.

AEs

EMDEs

C. Impact of 10-percent rise in U.S.
EPU on output growth

D. Impact of 10-percent rise in U.S.
EPU on investment growth

Percentage point
0.2
16-84 percent confidence bands

Percentage point
16-84 percent confidence bands
0.2
Median0.0MedianSpillovers to the UnitedStates from the global
economy

0.0
-0.2
-0.2

-0.4
-0.6

-0.4
-0.8
-0.6

-1.0
U.S.

AEs

EMDEs

U.S.

AEs

EMDEs

Sources: Haver Analytics, OECD, World Bank estimates.
Note: See Annex SF.1C for details on the methodology.

rates and be a source of adverse cross-border
spillovers through tightening financial conditions(Cardarelli and Kose 2004).
Uncertainty spillovers. Increased uncertainty
driven by financial market volatility or ambiguity
about the direction and scope of policies could
discourage investors—in the United States andelsewhere—that base their decisions about longterm investments on stable financing conditions
and predictable policies. Sustained increases infinancial market uncertainty, e.g., as captured in
the implied volatility of the U.S. stock market(VIX), could set back output and investment
growth in the United States, other advanced
economies and EMDEs (Carrière-Swallow andCéspedes 2013; Bloom 2009). A 10 percent
increase in the VIX could reduce average EMDE
output growth by about 0.2 percentage point and
EMDE investment growth by about 0.6
percentage point after one year (Figure SF.10).

Important as the U.S. economy is to the global
economy, the U.S. economy also benefits from thestrength of its linkages with the rest of the world(Figure SF.11). Moreover, global economic andfinancial developments play an important role indriving activity and financial markets in the
United States.
Global trade. In 2015, trade accounted for morethan one-quarter of U.S. GDP (28 percent) andmanufacturing output for slightly more than onefifth (22 percent) of GDP. Most U.S. goods
exports are manufacturing goods (87 percent of
U.S. goods exports), followed by agricultural
products (4 percent) and oil, gas and minerals (2percent). The most prominent goods export
categories are petroleum oils (other than crude),
motor vehicles and their parts, and electronicparts. Most U.S. goods and services exports areshipped to Canada, the EU, Mexico, and China,
which altogether account for more than 60
percent of total U.S. exports. Export-intensive
industries in the United States have tended to be
more productive and offered higher wages thannon-export-intensive industries: during 19892009, on average, their total factor productivity
growth was 51 percent higher; labor productivity
was 10 percent higher; and wages were 17 percent
higher (Council of Economic Advisors 2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Multinational corporations. Much global value
chain activity is conducted through U.S.
multinational corporations and their affiliates
abroad. Although U.S. multinationals account forless than 1 percent of the total number of U.S.
firms, since 1990, they accounted for one-third of
U.S. real GDP growth and almost half of U.S.
labor productivity growth (McKinsey Global
Institute 2010). As part of global supply chains,
U.S. multinationals rely heavily on exports andimports; in fact, the largest U.S. exporters are
multinationals (Moran and Oldenski 2016).
Multinationals’ presence in financial markets islarge; for example, they account for about 85
percent of the stock market capitalization of the
S&P500.
About 43 percent of total U.S. trade occurs within
multinational firms (intra-firm trade), especially inthe case of U.S. trade with advanced economies.
Since the global financial crisis, intra-firm trade
has continued to grow robustly (especially with
EMDEs) whereas arm’s-length trade has slowed
sharply.
Access to foreign markets has also benefited
domestic U.S. activity. For example, a 10 percent
increase in foreign direct investment by U.S.
multinationals abroad was accompanied by 2.6

FIGURE SF.11 Importance of the global economy for the
U.S. economy
Imported goods account for about one-sixth of consumption expenditures.
Multinational corporations make significant contributions to U.S. output,
exports, and employment. Global developments account for a sizablefraction of variation in business cycles in the United States. Growth shocks
originating in other economies, especially in other advanced economies,
have a significant impact on activity in the United States.
A. Share of imports in U.S.
consumption expenditures, 2009

B. Role of foreign multinational
corporations in the United States

Percent
35
30
25
20
15
10
5
0

Percent of U.S. total
30
25
20

PCE

Services

Goods

Motor vehicles

15
Durable housholdequipment
Nondurables ex.
en., cloth., footw.

Clothing andfootwearDurables ex. cars,
recr., hh. equip.
Recreational
goods

Global value chain participation. Many U.S.
companies are deeply integrated into global supply
chains. As a result, U.S. exports themselves areoften an input into other countries’ production forexports (“forward participation”). One-quarter ofU.S. exports represents U.S. value added
embodied in other countries’ exports. Suchforward participation is particularly high inchemicals, business services, and electronics, andwith China, Canada, and Mexico. “Backward
participation” is more limited: the average importcontent of U.S. exports was 13 percent in 2014,
well below the average for other advanced
economies (27 percent). However, in some U.S.
industries, imports account for more than 20
percent of inputs. These include apparel andleather products, motor vehicles, and computersand electronics (U.S. Trade Commission 2011).
Imports are often essential components that do
not have readily available domestic substitutes.

69

SPECIAL FOCUS

10
5
0
Sales

Exports

Imports Employment

C. Variance share of U.S. and G6
growthD. Spillover to United States from 1
percentage point increase in global,
other AE and EMDE growth

Percent
50

Percentage point
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
Global ex.
U.S.

US

G6

40
30
20
10
0
Global Factor

Advanced
EconomyFactorIdiosyncratic
Factors

GDP growth
Industrial production

AE ex. U.S.

EMDE

Sources: McCully (2011), Bureau of Economic Analysis, World Bank estimates.
A. Share of imports in U.S. personal consumption expenditures. “Durables ex. cars, recr., hh. equip.”stands for durables excluding motor vehicles and parts, recreational goods and vehicles, andfurnishings and durable household equipment. “Recreational goods” stands for recreational goods
and vehicles. “Durable household equipment” stands for furnishings and durable household
equipment. “Motor vehicles” stands for motor vehicles and parts. “Nondurables ex. en., cloth., footw.”
stands for nondurables excluding gasoline and other energy goods, clothing and footwear. “PCE”
stands for personal consumption expenditure and consists of goods and services.
B. Share of multinational corporations in U.S. sales, exports and imports of goods and employment.
“Sales” indicates sales of multinational corporations in gross output of U.S. private sector industries.
Data covers 2010-2013.
C. D. See Annex SF.1D for details on the methodology.

percent greater domestic investment in the UnitedStates (Desai, Foley, and Hines 2009). In turn,foreign multinationals operating in the UnitedStates provided 10 percent of U.S. employment
and 19 percent of U.S. exports, on average, during
2010-13 (Figure SF.11).
Global finance. Financial linkages between the
U.S. and the rest of the world, including emerging
market economies, have grown rapidly over the
past decade, potentially leading to two-way
spillovers. Financial market stress or sharp growth
slowdowns in the rest of the world can put

70

SPECIAL FOCUS

pressure on the U.S. financial system (IMF 2012;2013; 2014). For example, financial stress thatraises risk premia and widens output gaps by 1
percent in some major economies, could widen
the U.S. output gap by 0.1-0.35 percent (IMF2013).
A significant appreciation of the U.S. dollar,
which could be driven by increasingly divergent
monetary policies with other reserve currencies,
weakening growth prospects in the rest of theworld, or relatively sizable fiscal stimulus in the
United States, could have a negative impact on
U.S. growth as well. For example, a 10 percent
appreciation of the trade-weighted U.S. dollar,
could reduce U.S. GDP from baseline by over 1½
percent after three years, assuming no change inmonetary policy (Fischer 2015). The adverse effectwould materialize only gradually, with over half of
the impact occurring after more than a year.
Monetary
policyaccommodation
could
substantially ease the impact of a strengthening
dollar to about one-half to two-thirds of its direct
trade effect.13
Consumer and labor markets. About one-third of
U.S. consumer spending is on goods, of which
about one-sixth is on imported goods. The shareof imports in consumption expenditures is larger
for durable goods (29 percent)—especially durable
household equipment, motor vehicles, andrecreational goods—and clothing and footwear(32 percent). The United States hosts the world’s
largest number of immigrants (Chandy and Seidel2016). Immigrants accounted for 17 percent of
the U.S. civilian labor force, on average, in 2015,
and more than one-quarter in some parts of theUnited States. Immigrants originate from all over
the world, but mainly from Mexico, China, andIndia.14
Spillovers from the world to the United States.
Because of strengthening multidimensional
linkages between the United States and the rest of
the world, U.S. business cycles are highly
See Erceg, Guerrieri, and Gust 2006; Laforte and Roberts (2014);
Brayton, Laubach, and Reifschneider (2014).
14Immigration generally appears to raise aggregate wages and lower
prices as well as stimulate investment and innovation (Peri 2010;
Greenstone and Looney 2012; Hunt and Gaultier-Loiselle 2010;
Chellaraj, Maskus and Mattoo 2008).
13

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017synchronized with the global business cycle.
Global developments account for a sizable fractionof variation in business cycles in the United States.
In addition, growth shocks originating in othereconomies, especially in other advanced
economies, have a significant impact on activity in
the United States through demand spillovers(Bems, Johnson, and Yi 2010; Figure SF.11).15

Conclusion
Economic policy initiatives in the United States
can have sizable ripple effects around the world—atestament to the U.S. size and global integration.
Continuing uncertainty about the direction of
U.S. policies in itself could influence global
growth prospects. The incoming administration
promises major changes in key areas, including
fiscal policy and international trade. Many
questions arise about the domestic and global
implications of these changes. Given limited
knowledge to date about the scope and form of
the new policies, it is too early to rigorously
examine them, or to make detailed estimates of
their implications, especially as regards the new
direction on international trade. This Special
Focus aims to provide information that will assist
assessments of policies as and when they aredefined in operational terms and their global
implications. Relevant questions on the role of theUnited States in the global economy are as
follows:
What are the major channels of transmission ofdevelopments in the U.S. economy to other countries?
The United States is the world’s single largest
economy: it accounts for roughly one-quarter ofglobal output and about one-tenth of total tradeflows. It is also the single largest international
creditor and debtor. Given its massive size and thestrength of its ties with the global economy,shocks to the U.S. economy are transmitted
globally through a variety of channels, including
trade, finance, and commodity market linkages.
15Some recent studies examine the impact of shocks originating inother countries on activity in the United States (Bayoumi and
Swiston 2009; Osborn and Vehbi 2013; IMF 2014; Cashin,
Mohaddes and Raissi 2016). For the cyclical spillovers between U.S.
and global business cycles, see Kose, Otrok and Whiteman (2008);
Dees and Saint-Guilhem (2009); Huidrom, Kose, and Ohnsorge(2016); World Bank (2016).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

How strong are business cycle linkages between the
United States and other economies? U.S. businesscycles are highly synchronized with global businesscycles. Growth is often higher in rest of the world
during periods of U.S. expansions than it is during
U.S. recessions. The four global recessions since1960 all coincided with severe recessions in the
United States.
How large are global spillovers from shocks
originating in the United States? Shocks to U.S.
growth, changes in U.S. fiscal and monetary
policies, or uncertainty in U.S. financial markets
or policies all could have global spillovers. For
example, a surge in U.S. growth can be expectedto accelerate activity in the rest of the world. In
contrast, lingering uncertainty about the directionof U.S. policy could dampen activity andinvestment abroad.
How important is the global economy for the UnitedStates? Because of its size and reach, the UnitedStates is at the center of global trade and financial
networks. U.S. multinational corporations andtheir affiliates abroad are deeply integrated into
global supply chains. Financial linkages between
the U.S. and the rest of the world, including
emerging market economies, have grown rapidly
over the past decade, widening the potential forspillovers in either direction. These two-way
channels imply that, important as the U.S.
economy is for the global economy, the U.S.
economy is in turn affected by developments in
the rest of the world.
This Special Focus aims to provide thebackground required to inform an assessment of
U.S. policy initiatives and their global
implications. U.S. growth is expected to regain
only modest momentum to 2.2 percent in 2017,from a subdued 1.6 percent in 2016, predicatedon a broadly neutral fiscal stance expected for2017. Given the uncertainty about the eventual
shape of U.S. policies, these forecasts do not yet
include the likely impact of U.S. policy changes.
Many details of the new administration’s policy
plans have yet to be announced. For example, the
new administration has signaled its intention to
pursue more expansionary fiscal policies, including

SPECIAL FOCUS

personal and corporate tax cuts and tax incentives
to stimulate infrastructure upgrades, possibly
coupled with other federal spending changes.
Sizable fiscal stimulus measures could result infaster-than-anticipated U.S. growth in the nearterm. However, the positive growth impact ofthese actions could be offset by shifts in thepattern of federal government outlays that resultin sizable net spending cuts, or by fiscal
sustainability concerns. Changes in some other
U.S. policies, such as changes in trade policy,
could also offset the positive effects of fiscal
stimulus, or could even set back growth. Until
comprehensive and specific proposals are available,
the overall impact of U.S. policy changes on U.S.
and global activity cannot be assessed. However,
the isolated impact of some individualcomponents can be analyzed.
Reduction in corporate and personal income
taxes. The fiscal proposals put forward by the new
U.S. administration include a cut in the statutory
corporate income tax rate from 35 to 15 percent.
Such a corporate income tax cut could—by itself
and without considering other policies by the newadministration—boost U.S. GDP growth byaround 0.6 percentage point after four quarters
following implementation, and by cumulatively
0.9 to 1.3 percentage points after eight quarters,
depending in particular on the reaction ofmonetary policy authorities (Annex SF.2).
The new administration also proposed cutting
personal income taxes, especially for the highestincome earners; reducing the number ofindividual income tax brackets; and changing thestructure of tax deductions. If fully implemented,
these measures could reduce the average tax rateon personal income by about 2.5 percentage
points, and by over 7 percentage points for top
income earners (Nunns et al. 2016). Such a cut
could—by itself—increase U.S. GDP growth byaround 0.3 percentage point after four quarters
following implementation and by cumulatively
0.4 to 0.6 percentage point after eight quarters,
again depending in particular on the reaction ofmonetary policy authorities (Annex SF.2).
Taken together, these corporate and personal
income tax reforms could—without consideration

71

72

SPECIAL FOCUS

of additional policy changes by the newadministration—raise U.S. GDP growth forecasts
to 2.2-2.5 percent in 2017 and 2.5-2.9 percent in2018 (Annex SF.2). These estimates depend on
the timing of the tax cuts, the reaction ofmonetary policy authorities, the amount of slack
remaining in the U.S. economy, and how
businesses and households adjust their
expectations to these policy changes. In addition,these estimates do not specifically take into
account fiscal sustainability considerations.
Stronger U.S. growth would help global activity
by raising U.S. demand for trading partners’
exports. Empirical estimates indicate that a 1
percentage-point shock to U.S. growth could
boost growth after one year by 0.8 percentage
point in other advanced economies, and by 0.6
percentage point in EMDEs. In the illustrative
scenario of reforms to U.S. corporate and personal
income taxes discussed above, global growth could
rise by up to 0.1 percentage point in 2017 if tax
cuts are fully implemented in the second quarterof the year. In addition, global growth could riseby at least 0.3 percentage point in 2018,
depending on the timing of tax cuts and thereaction of U.S. monetary policy authorities.
Investment could respond even more strongly.
While some of the proposed U.S. corporate tax
reforms could potentially affect corresponding
fiscal revenues in other countries where U.S.
corporations operate, the net global impact ofstronger activity and investment in the UnitedStates is likely to be positive (Clausing, Kleinbard,
and Matheson 2016; Nicar 2015). These potential
positive spillovers from U.S. personal andcorporate income tax reforms could be amplified
or dampened by other policy changes.
For individual countries, the benefits of U.S. fiscal
stimulus would also depend on the impact on
exchange rates. If a fiscal stimulus wereaccompanied by U.S. dollar appreciation, debt
burdens for EMDEs with elevated U.S. dollardenominated liabilities would rise and become apotential source of financial strains.
Increase in infrastructure investment. The new
U.S. administration has signaled a number ofmeasures to stimulate infrastructure investment,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

but specifics remain to be clearly formulated forboth the overall size and the choice of measures(and, hence, their impact on activity). There havebeen suggestions of increasing both public
investment in transportation and infrastructure
and of boosting private investment through tax
credits. Empirical studies suggest that increases ingovernment infrastructure investment tend tohave large immediate effects on activity, with fiscal
multipliers often estimated to be markedly above 1(Auerbach and Gorodnichenko 2013; Bivens
2014; Whalen and Reichling 2015). Empiricalevidence regarding the effect of tax credit andpolicy-driven support to private investment ininfrastructure in the United States is limited.
Studies of comparable initiatives in Europe point
to positive but limited net effects (Claeys andLeandro 2016). Until additional details are
unveiled, it is difficult to quantify the potential
impact of these measures on the outlook.
Changes in federal spending. The new U.S.
administration has suggested sizable cuts in nondefense spending, likely accompanied by increases
in defense spending. While specific proposals have
not yet been made, it is possible that, on net,
overall federal spending will be substantiallyreduced. Accordingly, the impact of corporate andpersonal income tax cuts and infrastructure
spending on aggregate demand could be offset in
the short term if overall federal spending is also
cut. This offsetting effect would depend on the sizeof the net reduction in government outlays and on
the estimated fiscal multiplier of various spending
categories (Whalen and Reichling 2015).
Other policy proposals mentioned by the newadministration include changes to trade
agreements and import tariffs. If they lead tohigher import costs, policy initiatives torenegotiate trade agreements could be detrimental
to U.S. and global activity. For about one-quarterof the world’s countries, the United States is thelargest trading partner. Moreover, given thesignificant integration of many U.S. companies
into global supply chains, there could be evenlarger adverse collateral effects from imposing new
trade barriers if other countries were to retaliate(Noland, Robinson, and Moran 2016). Moredetailed information is needed to quantify the

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

potential costs of any new trade policies. However,even without any policy action by the UnitedStates, heightened uncertainty about potential
policy initiatives could set back already-weakglobal investment (Chapter 3). A 10 percent
increase in the U.S. Economic Policy Uncertainty
index or the VIX could reduce EMDE investment
growth by 0.6 percentage point after a year.
Global spillovers. In sum, given that policy
initiatives in the United States would havesignificant global implications, a robust U.S.
economy is critical for the health of the world
economy. On the one hand, a well-targeted fiscal
stimulus could lead to stronger growth in the
United States, which could be accompanied bysizable positive spillovers to the rest of the world
over the short term. On the other hand, risingtrade barriers and policy uncertainty could,
through feedbacks, negatively affect U.S. growth
as well as the global economy.

Annex SF. 1 Cyclicalspillovers
A. Spillovers from U.S. growth
Figure SF.8 shows the cumulative impulse
response of weighted average AE and EMDEGDP growth to a 1 percentage point increase in
growth in real GDP in the United States. Growth
spillovers to AE and EMDE are based on a
Bayesian vector autoregression of global GDP
growth excluding the United States and AE or
EMDE, U.S GDP growth, the U.S. 10-year
sovereign bond yield plus JP Morgan’s EMBI
index and AE or EMDE GDP growth. The oil
price is exogenous. Bars represent medians, anderror bars 16-84 percent confidence bands. The
Sample for AE includes Euro Area (19 countries),
Canada, Japan, and the United Kingdom and 19
EMDE for 1998Q1-2016Q2.
B. Spillovers from U.S. interest rateincreases
Figure SF.9A-C shows impulse responses after 12months from a panel vector autoregression modelthat includes EMDE industrial production, longterm bond yields, stock prices, nominal effective

SPECIAL FOCUS

exchange rates and bilateral exchange rates against
the U.S. dollar, and inflation. Monetary and realshocks are exogenous regressors. Monetary andreal shocks are defined as in Box 1 of Arteta et al.
(2015). All data are monthly or monthly averagesof daily data, spanning January 2013-September
2015. A total of for 23 EMDEs were included.
For comparability, the size of U.S. real andmonetary shocks is normalized such that eachshock raises EMDE bond yields by 100 basis
points on impact.
Figure SF.9D shows the impulse response ofcapital flows to EMDEs to a 100 basis point
increase in the U.S. term spread. The results are
based on a six-variable VAR model estimated overthe period 2001Q1 to 2014Q4 for 64 EMDEs(Arteta et al. 2015). The VAR model includes
capital flows to EMDEs (including foreign direct
investment, portfolio investment, and otherinvestment as a share of GDP), quarterly real
GDP growth in EMDEs and G4 countries(United States, Euro Area, Japan, and the United
Kingdom), real G4 short-term interest rates(three-month money market rates minus annual
inflation measured as changes in GDP deflator),
G4 term spread (10-year government bond yields
minus three month money market rates), and the
VIX index of implied volatility of S&P 500
options.
The grey area shows the range of estimated effects
on capital inflows depending on rate hikes of othermajor central banks. The lower bound corresponds
to unchanged policy rates by the European
Central Bank (ECB), Bank of England, and Bankof Japan, implying a 40 basis points shock to
global bond yields. The upper bound corresponds
to a 100 basis point increase in policy rates by the
ECB, the Bank of England and the Bank of Japan(i.e., a 100 basis points shock to global bondyields). In the median case, global bond yields
increase initially by 70 basis points, similar to the2013 “taper tantrum”.
C. Spillovers from U.S. policy and financial
market uncertainty
Figure SF.10 shows cumulative impulse responses
after one year on output growth (A.C.) or
investment growth (B.D.) in the United States, 23

73

74

SPECIAL FOCUS

other AEs, and 18 EMDEs to a 10-percent
increase in the VIX (A.B.) or in the U.S. EPU(C.D.). Vector autoregressions are estimated for
1998Q1-2016Q2 with two lags.
The model for the U.S. includes, in this order,
uncertainty index (VIX or U.S. EPU), U.S. stock
price index (S&P 500), U.S. 10-year bond yields,
U.S. real GDP, and investment growth.
The model for AEs includes uncertainty indexes(VIX or U.S. EPU), MSCI Index for advanced
economies (MXGS), U.S. 10-year bond yields,
aggregate real output, and investment growth in
23 other AEs.
The model for EMDEs includes uncertainty
indexes (VIX or U.S. EPU), the MSCI emerging
market equity price index, J.P. Morgan Emerging
Market Bond Index (EMBIG), aggregate real
output and investment growth in 18 EMDEs. G7
real GDP growth, U.S. 10-year bond yields, andthe MSCI world equity price index are added as
exogenous regressors.
D. Spillovers from the global economy to theUnited States
Figure SF.11C shows the contribution of global,
group-specific, and other factors to the variance ofGDP growth. A dynamic factor model is estimatedover the period 1985-2015, using a sample of 106
countries grouped into three regions: advanced
markets (AE), emerging and frontier markets(EM-FM), and other developing countries.
Variance decompositions are computed for eachcountry and, within each country, for output.
Each bar represents the variance share of U.S. andG6 output growth attributable to the global
factor, the AE-specific factor, the country-specificfactor and the idiosyncratic term.
Figure SF11.D shows cumulative impulse
responses after one year of GDP or industrial
production (IP) growth in the United States
following a 1 percentage point increase in GDP orindustrial production growth in 22 other AEs and
19 EMDEs (13 EMDEs for industrial
production). “Global” indicates the weighted
average impact of AEs and EMDEs. Vertical lines

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017indicate 16th-84th percentile confidence bands.
Vector autoregression models are estimated for
1998Q1-2016Q2 with four lags. The model
includes, in this order, global GDP or industrial
production growth excluding the United Statesand AE or EMDE, U.S. GDP or industrial
production growth, the U.S. 10-year sovereign
bond yield plus JP Morgan’s EMBI index and AE
or EMDE GDP or industrial production growth.
The oil price is exogenous.

Annex SF.2 Fiscal policy
simulations
The impact of corporate and personal income tax
changes on U.S. growth was simulated using theFederal Reserve Board’s model for the U.S.
economy (FRB/U.S.). Simulations assume full
implementation of both corporate and personal
income tax cuts at once (i.e., no phasing in). The
lower estimate of the growth impact after eightquarters assumes that monetary policy adjusts
following a traditional Taylor Rule. The upper
estimate assumes no monetary policy reaction.
Corporate income tax cut. A cut in the statutory
corporate income tax from 35 percent to 15
percent is modelled. The net loss of corporate tax
revenues, caused by a 15 percentage-point
reduction in the average effective marginal tax rate
implied by a 20 percentage-point statutory
corporate income tax cut (Nunns et al. 2016),
could amount to 1.2 percent of GDP in the firstyear. Implicitly, the fiscal multiplier—the
additional output generated for each additional
dollar of tax losses—would be 0.4 in the first year,
which is within the range of available estimates(Chahrour, Schmitt-Grohé, and Uribe 2012).
Personal income tax changes. A reduction in the
average tax rate on personal income by about 2.5
percentage points is modelled (Nunns et al. 2016).
The net loss of personal income tax revenues
caused by a 2.5 percentage point reduction in the
average effective marginal tax rate is estimated to
be around 1.0 percent of GDP in the first year,with a corresponding fiscal multiplier of 0.3. This
is at the lower end of the range of estimated fiscal
multipliers generally associated with personal

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

income tax cuts (0.3-1.5), but within the range of
estimated fiscal multipliers associated withpersonal income tax cuts targeted to higherincome households (0.1-0.6; Whalen andReichling 2015).
Taken together, these corporate and personal
income tax reforms could—without considerationof additional policy changes by the newadministration—raise U.S. GDP growth forecasts
to 2.2-2.5 percent in 2017 and 2.5-2.9 percent in2018. These tax reforms could support stronger
near-term growth by boosting households’ realdisposable income and companies’ after-tax
earnings and profit margins. According to the
FRB/U.S. model simulations, the largest shortterm growth effect would be associated with thesimulated corporate income tax cuts, withinvestment being boosted by a rise in corporate
profits and a reduction in the cost of capital. The
effect on consumption would be more limited, as
household savings are projected to increase
following the personal income tax cut.
The impact would depend on the timing of theimplementation of the tax reforms and themonetary policy response. In particular, the upperbound of the range of simulated U.S. growthforecasts assumes that both corporate and personal
income tax cuts are fully implemented in thesecond quarter of 2017, and monetary policy does
not react to the change in fiscal policy. In a more
realistic scenario where monetary policy
authorities adjust their policy stance, the growth
impact is somewhat reduced, particularly in 2018.
The lower bound of the range assumes bothdelayed implementation of the tax cuts to the firstquarter of 2018 and a tightening of monetary
policy in reaction to changes in fiscal policy. In thecase where monetary policy is allowed to react to amore rapid closing of the output gap, interest rates
are estimated to increase by an additional 60 basis
points after four quarters, and by up to 100 basis
points after eight quarters. The dollar would also
appreciate, while inflation would remain broadly
unchanged. The revenue loss for the government
would increase the budget deficit by around 2.4
percent of GDP after eight quarters.

SPECIAL FOCUS

References
Abbate, A., S. Eickmeier, W. Lemke, and M.
Marcellino. 2016. “The Changing International
Transmission of Financial Shocks: Evidence froma Classical Time-Varying FAVAR.” Journal of
Money, Credit and Banking 48 (4): 573-601.
Ammer, J., M. De Pooter, C. Erceg, and S.
Kamin. 2016. “International Spillovers of
Monetary Policy.” Board of Governors of theFederal Reserve System IFDP Notes.
Arteta, C., M. A. Kose, F. Ohnsorge, and M.
Stocker. 2015. “The Coming U.S. Interest Rate
Tightening Cycle: Smooth Sailing or Stormy
Waters?” Policy Research Note 15/02. World
Bank, Washington, DC.
Arteta, C., M. A. Kose, M. Stocker, and T.
Taskin. 2016. “Negative Interest Rate Policies:
Sources and Implications.” Discussion Paper
11433. Centre for Economic Policy Research,
London.
Auerbach, A., and Y. Gorodnichenko. 2013.
“Fiscal Multipliers in Recession and Expansion.”
In Fiscal Policy after the Financial Crisis Working
Paper, edited by A. Alesina and F. Giavazzi.
Chicago: University of Chicago Press.
________. 2016. “Effects of Fiscal Shocks in a
Globalized World.” IMF Economic Review 64: 177–215.
Baffes, J., M. A. Kose, F. Ohnsorge, and M.
Stocker. 2016. “The Great Plunge in Oil Prices:
Causes, Consequences and Policy Implications.”
Policy Research Note 1, World Bank,
Washington, DC.
Baker, S., N. Bloom, and S. Davis. 2015.
“Measuring Economic Policy Uncertainty.”
NBER Working Paper 21633, National Bureau of
Economic Research, Cambridge, MA.
Bayoumi, T., and A. Swiston. 2009. “Foreign
Entanglements: Estimating the Source and Size of
Spillovers Across Industrial Countries.” IMF Staff
Papers 56: 353-383.

75

76

SPECIAL FOCUS

Bems, R., R. C. Johnson, and K. M. Yi. 2010.
“Demand Spillovers and the Collapse of Trade in
the Global Recession.” IMF Economic Review 58(2): 295-326.
Berkmen, S. P., Gelos, G., Rennhack, R., andWalsh, J. P. 2012. “The Global Financial Crisis:
Explaining Cross-Country Differences in the
Output Impact.” Journal of International Moneyand Finance, 31(1): 42-59.
Bivens, J. 2014. “The Short- and Long-Term
Impact of Infrastructure Investments on
Employment and Economic Activity in the U.S.
Economy.” Economic Policy Institute. June 29.
Blanchard, O. 2016. “In Light of the Elections:
Recession, Expansion and Inequality.” Peterson
Institute for International Economics, Real Time
Economic Issues Watch, November 14. https://piie.com/blogs/realtime-economic-issues-watch/light-elections-recession-expansion-and-inequality.
Bloom, N. 2009. “The Impact of Uncertainty
Shocks.” Econometrica 77 (3): 623-685.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Policy,” Journal of Monetary Economics 71:119-32.
________. 2015b. “Cross-Border Banking and
Global Liquidity.” Review of Economic Studies 82(2), 535-564.
Canzoneri, M. B., R. E. Cumby, and B. Diba.
2003. “New View on the Transatlantic
Transmission of Fiscal Policy and Macroeconomic
Policy Coordination.” In Monetary and Fiscal
Policies in EMU, edited by M. Buti, 283–311.
Cambridge: Cambridge University Press.
Cardarelli, R., and M. A. Kose. 2004. “TheEconomic Impact of U.S. Budget Policies.” inChristopher Towe and Martin Muhleisen ed.,U.S. Fiscal Policies and Priorities for Long-Run
Sustainability, IMF Occasional Paper No: 227.
International Monetary Fund, Washington, DC.
Carrière-Swallow, Y.. and L. F. Céspedes. 2013.
“The Impact of Uncertainty Shocks in Emerging
Economies." Journal of International Economics 90(2): 316-325.

Borio, C. and H. Zhu. 2012. "Capital Regulation,
Risk-Taking and Monetary Policy: A Missing
Link in the Transmission Mechanism?" Journal of
Financial Stability 8: 236-51.

Cashin, P., K. Mohaddes, and M. Raissi (2012).
“The Global Impact of the Systemic Economies
and MENA Business Cycles.” Working Paper
12/255,International
Monetary
Fund,
Washington, DC.

Bown, C. 2016. “The Truth about Trade
Agreements – and Why We Need Them.”
VoxEU.org, November 29. http://voxeu.org/
article/truth-about-trade-agreements-and-why-weneed-them.

Chandy, L., and B. Seidel. 2016. “Donald Trump
and the Future of Globalization.” Brookings
Institution Up Front, November 18. https://www.brookings.edu/blog/up-front/2016/11/18/
donald-trump-and-the-future-of-globalization/.

Bowman, D., J. Londono, and H. Sapriza. 2015.
"U.S. Unconventional Monetary Policy andTransmission to Emerging Market Economies."
Journal of International Money and Finance 55: 2759.

Chahrour, R., S. Schmitt-Grohé, and M. Uribe.
2012. “A Model-Based Evaluation of the Debate
on the Size of the Tax Multiplier.” American
Economic Journal: Economic Policy 4 (2): 28–45.

Brayton, F., T. Laubach, and D. Reifschneider.
2014. “The FRB/U.S. Model: A Tool for
Macroeconomic Policy Analysis,” Board ofGovernors of the Federal Reserve System FEDS
Notes.
Bruno, V., and H. Shin. 2015a. “Capital Flowsand the Risk-Taking Channel of Monetary

Chellaraj, G., Maskus, K. E. and A. Mattoo.
2008. “The Contribution of International
Graduate Students to U.S. Innovation,” Review ofInternational Economics 16 (3): 444–62.
Chow, J., F. Jaumotte, S. Park, and Y. Zhang.
2015. “Spillovers from Dollar Appreciation.”
Working Paper No. 15/02, International
Monetary Fund, Washington, D.C.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017SPECIAL FOCUS

Chui, M. K., I. Fender, and V. Sushko, 2014.
“Risks Related to EME Corporate Balance Sheets:
the Role of Leverage and Currency
Mismatch.” BIS Quarterly Review 2014: 35-47.

Desai, M. A., C. F. Foley, and J. R. Hines. 2009.
“Domestic Effects of the Foreign Activities of US
Multinationals.” American Economic Journal:
Economic Policy 1 (1): 181-203.

Claeys, G., and A. Leandro. 2016. “Assessing theJuncker Plan After One Year.” Bruegel, Brussels.

Devereux, M. B., and S. Shi. 2013. “Vehicle
Currency.” International Economic Review 54 (1):97-133.

Clausing, K., E. Kleinbard, and T. Matheson.
2016. “U.S. Corporate Income Tax Reform andits Spillovers.” Working Paper 16/127,
International Monetary Fund, Washington, DC.
Constancio, V. 2016. “Euro Area: Economic
Outlook and Financial Sector Challenges.”
Speech, 19th Euro Finance Week Opening
Conference, November 14. European Central
Bank, Frankfurt. https://www.ecb.europa.eu/
press/key/date/2016/html/sp161114.en.html.
Council of Economic Advisors. 2015. Economic
Report to the President. Washington, DC: Councilof Economic Advisors.
Corsetti, G., A. Meier, and G. J. Müller. 2012.
“Fiscal Stimulus with Spending Reversals.” The
Review of Economics and Statistics 94 (4): 878–895.
De Grauwe, P., and Y. Ji. 2016. “International
Correlation of Business Cycles in a Behavioural
Macroeconomic Model.” CEPR Discussion Paper
11257. Centre for Economic Policy and Research,
London.
www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11257.
De Hoyos, R. E., and L. Iacovone. 2013.
“Economic Performance under NAFTA: A FirmLevel Analysis of the Trade-Productivity
Linkages.” World Development 44: 180-193.
Dées, S., and A. Saint Guilhem. 2009. “The Roleof the United States in the Global Economy and
Its Evolution over Time.” Working Paper Series
1034, European Central Bank, Frankfurt.
Dées, S., and I. Vansteenkiste. 2007. “TheTransmission of US Cyclical Developments to theRest of the World.” Working Paper 798,
European Central Bank, Frankfurt.

Druck, P., N. E. Magud, and R. Mariscal. 2015.
"Collateral Damage: Dollar Strength andEmerging Markets’ Growth" Working Paper
15/179,International
Monetary
Fund,
Washington, DC.
Ehrmann, M., and M. Fratzscher. 2009. “Global
Financial Transmission of Monetary Policy
Shocks.” Oxford Bulletin of Economics andStatistics 71 (6): 739-759.
Ehrmann, M., M. Fratzscher, and R. Rigobon.
2011. “Stocks, Bonds, Money Markets andExchange Rates: Measuring International
Financial Transmission.” Journal of Applied
Econometrics 26 (6): 948-974.
Eickmeier, S. 2007. "Business Cycle Transmission
from the US to Germany—A Structural Factor
Approach." European Economic Review 51 (3): 521-551.
Eldridge, L. P, and M. J. Harper. 2010. “Effects ofImported Intermediate Inputs on Productivity.”Monthly Labor Review 133 (6): 3-15.
Enders, Z., G. J. Müller, and A. Scholl. 2011.
“How do Fiscal and Technology Shocks affect
Real Exchange Rates? New Evidence for theUnited States.” Journal of International Economics
83: 53–69.
Erceg, C., L. Guerrieri, and C. Gust. 2006.
“SIGMA: A New Open Economy Model for
Policy Analysis.” International Finance Discussion
Papers 835, Board of Governors of the Federal
Reserve System, Washington, DC.
Faccini, R., H. Mumtaz, and P. Surico. 2016.
“International Fiscal Spillovers.” Journal ofInternational Economics 99: 31–45.

77

78

SPECIAL FOCUS

Fischer, S. 2015. “The Transmission of Exchange
Rate Changes to Output and Inflation.” Speech,
Monetary
PolicyImplementation
andTransmission in the Post-Crisis Period conference,
Board of Governors of the Federal Reserve
System, November 12, Washington, DC.
Forni, M., and L. Gambetti. 2016. “Government
Spending Shocks in Open Economy VARs.”
Journal of International Economics 99: 68–84.
Francis, N., M. T. Owyang, and D. Soques. 2015.
“Does the United States Lead Foreign Business
Cycles?” Federal Reserve Bank of St. Louis Review
97 (2): 133-158.
Frankel, J., and G. Saravelos. 2012. “Can Leading
Indicators
AssessCountry
Vulnerability?
Evidence from the 2008-09 Global Financial
Crisis.” Journal of International Economics 87 (2):216-231.
Frazer, G., and J. Van Biesebroeck. 2010. “Trade
Growth under the African Growth andOpportunity Act.” The Review of Economics andStatistics 92 (1): 128-144.
Georgiadis, G. 2015. “Determinants of Global
Spillovers from US Monetary Policy.” Journal ofInternational Money and Finance 67: 41-61.
Glick, R., and S. Leduc. 2013. "The Effects ofUnconventional and Conventional U.S. Monetary
Policy on the Dollar." Working Paper 2013-11,
Federal Reserve Bank of San Francisco.
Goldberg, L. S. and C. Tille. 2008. “Vehicle
Currency Use in International Trade.” Journal ofInternational Economics 76 (2): 177-192.
________. 2016. “Micro, Macro, and Strategic
Forces in International Trade Invoicing: Synthesis
and Novel Patterns.” Journal of International
Economics 102: 173-187.
Greenstone M., and A. Looney. 2012. “What
Immigration Means For U.S. Employment andWages.” Brookings Institution, May 4.
Washington, DC. https://www.brookings.edu/
blog/jobs/2012/05/04/what-immigration-meansfor-u-s-employment-and-wages/.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Handley, K. 2014. “Exporting Under Trade
Policy Uncertainty: Theory and Evidence.”
Journal of International Economics, 94 (1): 50-66.
Handley, K., and N. Limao. 2015. “Trade andinvestment under policy uncertainty: theory andfirm evidence.” American Economic Journal:
Economic Policy 7 (4): 189-222.
Helbling, T., R. Huidrom, M. A. Kose, and C.
Otrok. 2011. “Do Credit Shocks Matter? A
Global Perspective.” European Economic Review 55(3): 340-353.
Huidrom, R., M. A. Kose, and F. Ohnsorge.
2016. “Challenges of Fiscal Policy in Emerging
and Developing Economies.” CEPR Discussion
Paper 11347. Centre for Economic Policy andResearch, London.
Hunt, J., and M. Gauthier-Loiselle. 2010. “How
Much Does Immigration Boost Innovation?”
American Economic Journal: Macroeconomics 2 (2):31–56.
IMF (International Monetary Fund). 2013. “2013Spillover Report.” International Monetary Fund,
Washington, DC.
________. 2014. “2014 Spillover Report.”
International Monetary Fund, Washington, DC.
________. 2015a. “2015 Spillover Report.”
International Monetary Fund, Washington, DC.
________. 2015b. “Spillovers from Dollar
Appreciation.” International Monetary Fund,
Washington, DC.
________. 2016. World Economic Outlook:
Subdued Demand: Symptoms and Remedies.
Washington, DC: International Monetary Fund.
________. 2007. World Economic Outlook:
Spillovers and Cycles in the World Economy.
Washington, DC: International Monetary Fund.
Jansen, W. J., and A. C. Stokman. 2004. “Foreign
Direct Investment and International Business
Cycle Comovement.” ECB Working Paper 401,
European Central Bank, Frankfurt.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Kose, M. A. 2003. “Globalization and Business
Cycles in the United States,” United States—
Selected Issues, IMF Country Report, No. 03/245,
Chapter VIII, 74-80. Washington, DC:
International Monetary Fund.
Kose, M. A., Prasad, E. S. and M. E. Terrones.
2004. “Volatility and Comovement in Globalized
World Economy:
An Exploration,” inMacroeconomic Policies in the World Economy,edited by H. Siebert, 89-122. Berlin-Heidelberg:
Springer-Verlag.
Kose, M. A., G. Meredith, and C. Towe. 2005.
“How Has NAFTA Affected the Mexican
Economy? Review and Evidence.” In Monetary
Policy and Macroeconomic Stabilization in Latin
America, edited by R. Langhammer and L. de
Souza, 35-81. Berlin, Heidelberg: Springer-Verlag.
Kose, M. A., A. Rebucci, and A. Schipke. 2005.
“Macroeconomic Implications of CAFTA-DR.” inMarkus Rodlauer and Alfred Schipke ed., Central
America: Global Integration and Regional
Cooperation. IMF Occasional Paper 243, 7-40.
International Monetary Fund, Washington, DC.
Kose, M. A., C. Otrok, and C. Whiteman. 2008.
“Understanding the Evolution of World Business
Cycles.” Journal of International Economics 75 (1):
110–130.
Kose, M. A., and M. E. Terrones. 2015. Collapse
and Revival: Understanding Global Recessions andRecoveries. Washington, DC: International
Monetary Fund.
Laforte, J. P. and J. Roberts. 2014. “November
2014 Update of the FRB/U.S. Model.”, Boardof Governors of the Federal Reserve System
FEDS Notes, https://www.federalreserve.gov/
econresdata/notes/feds-notes/2014/november2014-update-of-the-frbus-model-20141121.html.
Lane, P. R., and G. M. Milesi-Ferretti. 2007.
"The External Wealth of Nations Mark II:
Revised and Extended Estimates of Foreign Assets
and Liabilities, 1970–2004." Journal ofInternational Economics 73: 223-250.

SPECIAL FOCUS

Lederman, D., W. F. Maloney, and L. Serven.
2005. Lessons from NAFTA for Latin America andthe Caribbean. Palo Alto, CA: Stanford University
Press.
Mattoo, A., D. Roy, and A. Subramanian. 2003.
“The Africa Growth and Opportunity Act and its
Rules of Origin: Generosity Undermined?” The
World Economy 26 (6): 829-851.
McCauley, R. N., P. McGuire, and V. Sushko,
2015. “Dollar Credit to Emerging Market
Economies.” BIS Quarterly Review 2015: 27-41.
Metiu, N., B. Hilberg, and M. Grill. 2015.
“Financial Frictions and Global Spillovers.”
Discussion Paper 04/2015, Deutsche Bundesbank,Frankfurt.
McKinsey Global Institute. 2010. “Growth andCompetitiveness in the United States: the Role ofits Multinational Companies.” McKinsey &Company.
Moran T., and L. Oldenski. 2016. “HowOffshoring and Global Supply Chains Enhance
the US Economy.” Policy Brief 16-5, Peterson
InstituteforInternational
Economics,
Washington, DC.
Nicar, S. B. 2015. “International Spillovers from
U.S. Fiscal Policy Shocks.” Open Economies Review
26 (5): 1081-1097.
Noland, M., G. Hufbauer, S. Robinson, and T.
Moran. 2016. “Assessing Trade Agendas in the
U.S. Presidential Campaign.” PIIE Briefing 16-6,
Peterson Institute of International Economics,
Washington, DC.
Neely, C. 2015. "Unconventional Monetary
Policy Had Large International Effects." Journal of
Banking and Finance 52: 101-111.
Nicar, S. B. 2015. “International Spillovers from
U.S. Fiscal Policy Shocks.” Open Economy Review
26: 1081–1097
Nunns, J., L. Burman, B. Page, J. Rohaly, andJ. Rose. 2016. “An Analysis of Donald Trump’s
Revised Tax Plan.” Tax Policy Center,
Washington, DC.

79

80

SPECIAL FOCUS

Osborn, D., and T. Vehbi. 2013. “Empirical
Evidence on Growth Spillovers from China to
New Zealand.” Working Paper 13 (17), New
Zealand Treasury, Auckland.
Peri, G., 2010. “The Effect of Immigrants on U.S.
Employment and Productivity.” FRBSF Economic
Letter 26: 1-5.
Ravn, M. O., S. Schmitt-Grohé, and M. Uribe.
2012. “Consumption, Government Spending, andthe Real Exchange Rate.” Journal of Monetary
Economics 59 (3): 215–234.
Rey, H. 2015. “International Credit Channel andMonetary Policy Autonomy.” Paper prepared forthe 15th Jacques Polak IMF Annual Research
Conference, International Monetary Fund,
Washington, DC.
Roache, S. K. 2008. “Central America’s Regional
Trends and U.S. Cycles,” IMF Working Paper
08/50,
International
Monetary
Fund,
Washington, DC.
Romalis, J. 2007. “NAFTA’s and CUSFTA’s
Impact on International Trade,” The Review of
Economics and Statistics 89 (3): 416–435.
Rose, A., and M. Spiegel. 2011. “Cross-Country
Causes and Consequences of the Crisis:
An Update.” European Economic Review 55 (3):309–324.
Spence, M. 2016. “Donald Trump and the New
Economic Order.” Project Syndicate. November
29.https://www.project-syndicate.org/
commentary/nationalist-approach-to-economicpolicy-by-michael-spence-2016-11.
Stock, J. H. and M. W. Watson. 2005.
“Understanding Changes in International Business
Cycle Dynamics.” Journal of the European
Economic Association 3 (5): 968-1006.
Sun, Y., and W. Samuel. 2009. “ECCU Business
Cycles: Impact of the United States.” Working

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Paper 09/71, International Monetary Fund,
Washington, DC.
Swiston, A., and M.T. Bayoumi. 2008. “Spillovers
across NAFTA.” Working Paper 08/3,
International Monetary Fund, Washington, DC.
U.S. Energy Information Administration (EIA).
2016. Short-Term Energy Outlook November 2016.
Washington, DC.
United States International Trade Commission.
2011. “The Economic Effects of Significant U.S.
Import Restraints. Seventh Update 2011. Special
Topic: Global Supply Chains.” Investigation 332325. Washington, DC.
Whalen, C., and F. Reichling. 2015. “The Fiscal
Multiplier and Economic Policy Analysis in the
United States.” Working Paper 2015/02,
Congressional Budget Office, Washington, DC.
World Bank. 2015a. “Commodity Markets
Outlook.” July. World Bank: Washington, DC.
________. 2015b. Having Fiscal Space and Using
It: Global Economic Prospects January 2015.
Washington, DC: World Bank.
________. 2016a. Spillovers and Weak Growth:
Global Economic Prospects January 2016.
Washington, DC: World Bank.
________. 2016b. Migration and Remittances:
Recent Developments and Outlook. Migration andDevelopment Brief. Washington, DC: WorldBank.
________. 2016c. OPEC in Historical Context:
Commodity Markets Outlook October 2016.
Washington, DC: World Bank.
Yifan, S., and T. Abeysinghe. 2016. International
Transmission of Growth Shocks and the World
Business Cycle. National University of Singapore,
Department of Economics SCAPE Working Paper
Series 2016/02.

CHAPTER 2REGIONALOUTLOOKS

Regional output expanded by an estimated 6.3 percent in 2016, slightly slower than in 2015. Strong domestic
spending, supported by generally benign financing conditions, largely offset weak export growth. China
continued on the path of gradual deceleration and rebalancing. In the rest of the region, growth remained
steady at 4.8 percent, as higher growth in commodity importers offset a slowdown in commodity exporters,
which continue to adjust to lower prices. During 2017-19, regional growth is expected to moderate to 6.1
percent, with a gradual slowdown in China partly offset by a pickup in the rest of the region. Downside risks to
the outlook increased compared to June. They include heightened policy uncertainty in major advanced
economies; financial market disruptions; growth disappointments in major economies; as well as risingprotectionist sentiments. Key policy challenges include an orderly rebalancing in China, and strengthening
medium-term fiscal policies and macro-prudential frameworks across the region. Structural reforms that support
long-term growth are a priority to mitigate the effects of protracted weakness in advanced economies.

Recent developments
Growth in the East Asia and Pacific (EAP) region
slowed slightly, from 6.5 percent in 2015 to 6.3
percent in 2016, in line with previous expectations(Table 2.1.1). In China, output expanded at a 6.7
percent rate in 2016 (Figure 2.1.1). Output
growth in the region excluding China was 4.8
percent, unchanged from 2015, as a modest
acceleration in commodity importers was offset byweaker growth in commodity exporters, which
continue to adjust to lower commodity prices.
Narrowing domestic and external imbalances, andstronger policy buffers amid solid growth, havecontributed to improved regional resilience toexternal headwinds (World Bank 2016a).
China
Growth in China continues to slow gradually, andactivity is rebalancing away from industry toservices (Zhang 2016). Output expanded by an
estimated 6.7 percent in 2016, slightly down from
6.9 percent in 2015. The services sector, which
Note: This section was prepared by Ekaterine Vashakmadze with
contributions from Hideaki Matsuoka, Jongrim Ha, and Shu Yu.
Research assistance was provided by Liwei Liu.

now constitutes about half of GDP, has overtaken
industry as a driver of growth. Industrial
production growth has stabilized at around 6
percent year-on-year after several years of sluggish
activity due to widespread overcapacity. As
overcapacity eased and prices of raw materials
began to recover, producer price inflation, which
has been negative since 2012, bottomed out.
Accommodative policies continued to support
economic activity, including multiple policy
interest rate cuts in 2015 that were complemented
by fiscal measures since mid-2015. Policysupported infrastructure investment, has partly
offset a decline in private investment (Chapters 1
and 3; Lardy and Huang 2016). Accommodative
monetary policy continued to fuel credit growth,
led by a rapid expansion of lending to households(around 19.5 percent on average in 2016
compared to 16 percent on average in 2015).
Total credit to the non-financial sector (core debt)
rose to new highs (255 percent of GDP in thesecond quarter of 2016) (BIS 2016). Housing
prices in major cities also reached new records. In
2016, prices grew on average by 47 percent inShenzhen, around 30 percent in Hefei, Nanjing,
Shanghai, and Xiamen, and 20 percent in Beijing.
Prices started to stabilize in Shenzhen since May,

84

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.1 Growth(about 50 percent above the 2005 levels in real
trade-weighted terms).

Growth slowed to 6.3 percent in 2016 and is expected to edge down to 6.1
percent in 2017-19. This reflects the gradual slowdown in China and amodest pickup in the rest of the region. Strong domestic demand—helped
by low inflation, easier financing conditions, and robust FDI flows—haslargely offset weak export growth.

Percent
12
8

3

4

-1

0
Consumption

7

2011-122013-142015
2016f

2011-122013-142015
2016f

2011-122013-14
2015
2016f

-5

China

Commodity importers Commodity
exporters(ex. China)

C. Exports of goods and services
Percent
19

1990-08
2016Q1

2010-13
2016Q2

2010-141990-08

China

Consumption

11

Investment
Imports
2003-08

Investment

Consumption
Exports
1990-08

Rest of the region
2015
2003-08

2016f

Investment

Percent

Consumption

B. GDP components

Investment

A. GDP growth and contributions

Commodity importers Commodity
exporters(ex. China)

D. FDI

2014-15
2016Q314
9Percent of GDP
2011
2012
2015
1990-084

2013
2003-08

2014

3

4

2

-1

Commodity
importers

Malaysia

Indonesia

Philippines

Thailand

Vietnam

China-6Commodity
exporters

China’s net foreign asset position remains firmly
positive (16.3 percent of GDP at the end of thefirst quarter of 2016).

10Commodity importers Commodity exporters(ex. China)

Sources: Haver Analytics; International Monetary Fund; United Nations Conference on Trade andDevelopment; World Development Indicators, World Bank.
A. Commodity exporters include Indonesia, Malaysia, Mongolia, Myanmar, Papua New Guinea,
Tonga, and Timor-Leste. Commodity importers include Cambodia, the Philippines, Samoa, theSolomon Islands, Thailand, Tuvalu, Vanuatu, and Vietnam. 1990-08 and 2003-08 show average
GDP growth.
B. Commodity exporters include Indonesia, Lao, PDR, and Malaysia. Commodity importers include
Cambodia, Philippines, Solomon Islands, Thailand, and Vietnam.
C. For Vietnam and China, 2016 data are exports of goods.
D. FDI inflows. Weighted average.

followed by other major cities since October,reflecting tighter property regulations.
Financial markets have remained stable since
February 2016. Capital outflows have eased,
but remain sizable (net capital outflows were
estimated at around 4 percent of GDP in thesecond quarter of 2016) (Figure 2.1.2). Foreign
reserves continued to fall in 2016 (declining $0.3
trillion during January-November 2016), but at a
slower pace than in 2015. The renminbi has
depreciated around 7 percent against the U.S.
dollarand around 5 in trade-weighted terms during
2016. Notwithstanding these movements, therenminbi remains about 40 percent above the2005 levels in nominal trade-weighted terms

Growth in the rest of the region remained at 4.8
percent—close to its long-term average, as feeble
external demand was largely offset by robust
domestic demand. Low and declining inflation
enabled EAP central banks to ease or maintainaccommodative monetary policy stances in 2016
(Figure 2.1.3). Growth picked up in commodity
importers, led by Thailand and the Philippines. In
the Philippines, growth was boosted by theaccelerated implementation of public investment
projects and continued strong growth of services
exports. In Thailand, activity was further buoyedby improved confidence. Exports of goods
provided support to growth in Cambodia, whichenjoys sizable foreign direct investment into its
garments sector (World Bank 2016b). Severe
drought and weak exports weighed on growth inVietnam.
An acceleration of output in commodity importers
was offset by softening activity in commodity
exporters (Lao PDR, Malaysia, Myanmar,
Mongolia, Papua New Guinea), which continue
to adjust to lower commodity prices. In Malaysia,
lower revenue from energy exports narrowed
the current account surplus and weighed on
growth, but resilient domestic demand provided
some support. In Myanmar, growth moderated
reflecting a correction in the real estate market,
an adjustment in the construction sector, andweak external demand. Growth slowdown was
sharper in smaller, less diversified commodity
exporters (Mongolia and Papua New Guinea),
where the adjustment involved a correction oflarge imbalances. In contrast, Indonesia—thelargest commodity-exporting country in theregion—has adjusted rapidly to lower commodity
prices. Furthermore, accommodating monetary
policy helped lift domestic demand, contributing
to a modest rise in Indonesian growth to 5.1
percent in 2016.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Vulnerabilities
In China, the continued rapid expansion of credit
to state-owned enterprises and households has
increased macroeconomic risks (Arslanalp andTsuda 2014, World Bank 2016a; Figure 2.1.5).
Policy tightening in Indonesia (until 2015) andtighter macro-prudential regulations in Malaysia
and Thailand have helped contain financial
stability risks (BIS 2016; IMF 2015a,b). However,household balance sheets in Malaysia andThailand remain vulnerable due to elevatedborrowing before the 2013 taper tantrum. Sizable
external financing requirements remain a source ofvulnerability in Indonesia, while shallow policy

Sources: Bloomberg, Haver Analytics, International Monetary Fund, World Bank.
D. e = estimate.

buffers are a concern in smaller countries(Mongolia, Papua New Guinea, especially, andto some extent in Lao PDR and Vietnam). In thePhilippines and Vietnam, credit continues to growrapidly, although the stock of debt remains at
moderate levels.

OutlookThe baseline forecast envisages an easing in growth
to 6.1 percent on average in 2017-19, in line with
June projections. This involves a gradualslowdown in China, which offsets a pickupof activity in the rest of the region. Growth in
the region excluding China is projected toaccelerate from 4.8 percent in 2016 to 5.2 percent
on average in 2018-19. This largely reflects a

Q3 2016eMay-15

Feb-16

Q2 2016

Q1 2016

2015

2014

Current accountNet capital flows
Change in reserves

2013

2012

2011

Q3 2016

Q1 2016

Q3 2015

Q1 2015

Percent of GDP
6
4
2
0
-2
-4
-6
-8

Q3 2014

Onshore vs offshore rate spread (RHS)
Nominal vs. USD
REER CPI based
Percent
Index. Jan. 2010=100
130
3
120
2
110
1
100
0
90
-1
80
-2
Q1 2014

D. Balance of payments

Q3 2013

C. Nominal and real effective
exchange rates

Aug-14Feb-13

Nov-13Q3 2016

Q2 20162015

Q1 2016

2014

2013

2012

2011

2010

Aug-11

Percent, year-on-year
10Consumer price index
8
Production price index
6
4
2
0
-2
-4
-6
-8

Industry and construction
ServicesGDP

May-12

Percent, year-on-year
14
12
10
8
6
4
2
0

Feb-10B. Consumer and producer priceindexes

Nov-10

A. Real GDP growth

Nov-16Growth in China continues to gradually slow and rebalance. The services
sector, which now constitutes about half of GDP, has overtaken industry asa driver of growth. Producer price inflation bottomed out, as adjustment inovercapacity sectors eased and prices of raw materials leveled off.
Financial markets have stabilized. Net capital outflows have eased after a
20 percent drawdown of foreign reserves from the August 2014 peak.
Pressures on the renminbi also eased.

Q1 2013

Corporate and sovereign risk spreads, which rose
across the region in late 2015 and early 2016, havegenerally narrowed (IMF 2016a). Regional
currencies have remained broadly stable against
the U.S. dollar for most of 2016, with the
exception of the Mongolian tugrik. However, theycame under renewed pressure in the last quarter ofthe year, especially in Malaysia, reflecting
heightened global volatility and prompting
authorities to introduce additional measures toenhance liquidity in the foreign exchange market.

FIGURE 2.1.2 China: Activity, exchange rates, andexternal accounts

Q3 2012

Following a period of stability since February
2016, financial markets experienced renewedvolatility toward the end of the year amid
heightened policy uncertainty in the United Statesand market reaction to the U.S. federal funds rate
hike in December. Net capital inflows, which had
resumed in 2016 reflecting accommodative
monetary policies in advanced economies, eased
towards the end of the year (Figure 2.1.4). In
contrast to global trends, FDI to the EAP region
remained buoyant, especially to Cambodia,
Indonesia, Lao PDR, Malaysia, Myanmar,
Thailand, and Vietnam. Economic liberalization,
regional
integration,
includingthrough
Association of Southeast Asian Nations (ASEAN)
Economic Community (AEC), and a return ofdomestic political stability were among the reasonsfor the resilience of FDI to the EAP region(Uttama 2016). Chinese investors continue to beheavily involved in various projects across theregion and Japan remains another importantsource of FDI flows to several regional economies.

85

EAST ASIA AND PACIFIC

86

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.3 EAP region: Selected indicators

Commodity exporters

Since the taper tantrum of mid-2013, policy tightening in Indonesia (until2015), and tighter macro-prudential regulations in the rest of the region,
have helped to reduce, but did not eliminate vulnerabilities. Credit growth
has moderated across the region (except in China, the Philippines andVietnam). In combination with low inflation, this enabled EAP central banks
to ease or maintain an accommodative monetary policy stance in 2016.
Low and declining inflation has helped to lower bond yields, but theyremain relatively elevated in Indonesia and Vietnam by comparison to otherregional EMDEs.

Growth in commodity-exporting economies is
projected to recover from 4.9 percent in 2016 toits long-term average of 5.3 percent in 2018, as
they make progress in adjusting to the lower
commodity price environment. In Indonesia,
growth is expected to accelerate from 5.1 percent
in 2016 to 5.4 percent on average in 2017-19,
helped by a pickup in private investment (WorldBank 2016c). In Malaysia, growth is projected torecover to 4.5 percent in 2017-19 as adjustment tolower energy prices eases and commodity prices
stabilize (World Bank 2016d). In Myanmar,
growth is projected at 7 percent on average in2017-18, helped by a pickup in foreign anddomestic private investment. In Lao PDR, growthis expected to remain around 7 percent, supported
by investment in the power sector and growing
regional integration (Table 2.1.2).

A. Policy rates

4

Commodity
importers

Malaysia

Indonesia

Mongolia

Thailand

China

Philippines

Vietnam0Commodity
exporters

C. Inflation
Percent

2013
2016

Commodity
exporters

Commodity
importers

D. Ten-year sovereign bond yields
2011
2016

10

2012
2015

Malaysia

8

2011
2014

Indonesia

12

Percent
25
20
15
10
5
0

Vietnam

Q1 2016

Philippines

2013-15
Q3 2016

China

2011-12
Q2 2016

Thailand

Percent
16

B. Credit growth

2012-14
2003-08

2015

Percent
12

8

9

6

6

4

3

2

2016
2008-10

Latest2011-15

2003-08

Commodity
importers

Malaysia

Indonesia

China

ThailandPhilippines

Commodity
exporters

Commodity
importers (ex.
China)

EAP (ex.
China)

China

Vietnam00Commodity
exporters

Sources: Haver Analytics, International Monetary Fund, World Bank.
A. Policy rates are average of end-of-period data.
B. Average year-on-year growth from January to September for 2016. Data for Vietnam in 2016 arethrough August and China through October.
D. Last observation is December, 2016.

recovery of growth in commodity exporters to its
long-term average rate. Growth in commodity
importers excluding China is projected to remainbroadly stable.
China
In China, growth is projected to continue its
orderly slowdown from 6.7 percent in 2016 to 6.4
percent in 2017-19. Macroeconomic policies are
expected to support key domestic drivers ofgrowth despite the softness of external demand,
weak private investment, and overcapacity in some
sectors. The pace of rebalancing from investment
to consumption, and from industry to services is
expected to moderate. This outlook depends on
the smooth progress of structural reforms,
including progress in reducing financial excesses.

The growth outlook has deteriorated markedly inseveral small commodity exporters of the region,
where the terms-of-trade shock has exacerbateddomestic vulnerabilities (Mongolia, Papua New
Guinea). Part of the slowdown in Papua New
Guinea was related to Liquefied Natural Gas(LNG) output reaching capacity in 2015-16. In
Timor-Leste, growth in the non-oil economy isexpected to rebound to between 5 and 6 percent
in the medium term, led a recovery of public
investment.
Commodity importers
Growth in commodity-importing economies is
projected to remain at around 5.0 percent on
average in 2018-2019, in line with the long-term
average. Helped by improved confidence andaccommodative policies, growth in Thailand is
projected to rise toward its trend rate of about
3.4 percent. Among the large commodity
importers, Vietnam and the Philippines continue
to have the strongest growth prospects, although capacity constraints will likely limit
acceleration in the medium term and could cause
overheating pressures. In the Philippines, growthis projected to accelerate to 6.8 percent on averagein 2017-19, supported by ongoing infrastructure
projects, strong consumption, buoyant inflows of

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.4 EAP region: Selected indicators (cont’d)
Unlike Thailand, current account surpluses narrowed in Malaysia and thePhilippines, while tight policies until 2015 helped to reduce current accountdeficit in Indonesia. Financial market conditions have been stable in thesecond and third quarters of 2016 and have been accompanied by net
capital inflows to the region. Regional currencies, except the Mongolian
tugrik, as well as equity and bond markets have recovered before renewedmarket volatility in late 2016, which was related to heightened policy
uncertainty in the advanced economies.
B. Current account balances, capital
flows and change in reserves

D. Stock markets

Percent
40

Percent
30
20
10
0
-10
-20

In addition to heightened policy uncertainty in
key major advanced economies, protectionist
pressures have mounted globally, contributing to a
post-crisis high in new trade restrictions in 2016.
Rising protectionist sentiments creates uncertainty
about the future of well-established trading
relationships, thereby adding risks to the regional
outlook. Even within the parameters of current

Commodity
importers

Commodity
exporters

Commodity
importers

Q3 2016e

Q2 2016

Commodity
exporters

Sources: Bloomberg, Haver Analytics, International Monetary Fund, World Bank staff estimates.
B. Sample includes Indonesia, Malaysia, Thailand, and Philippines; e = estimate.
C. Positive values indicate depreciation.
D. Percent change. 2016 data are through November.

international safeguards, WTO members could
legally triple import tariffs (Chapter 1). These
welfare losses would disproportionately affect themore open economies in the EAP region, which
relies on trade as a key engine for growth.
An unexpected deceleration in major economies,
especially in the Unites States or weaker-thanexpected global trade would dampen growth in
the region (Figure 2.1.7). A faster-than-expected
slowdown in China would also have sizable
regional spillovers (Dizioli et al. 2016; Zhai andMorgan 2016; World Bank 2016b). A one-time,
1-percentage-point unexpected decline in China's
growth rate reduces growth by around 0.4
percentage point after two years in Indonesia,
Malaysia, and Thailand. The magnitude ofIndonesia

Malaysia

Indonesia

Malaysia

Mongolia

Vietnam

SolomonIslands

Thailand

China

Philippines-10

Vietnam

10

Thailand20

Jan 2015-Dec 2016
Jan 2016-Aug 2016
Aug 2016-Dec 2016

China

Jan 2015-Dec 2016
Jan 2016-Aug 2016
Aug 2016-Dec 2016

0

Policy uncertainty, either domestic or in majoradvanced economies, tends to raise risk premiums
and depress investment and activity (Chapters 1
and 3). According to estimates, a one standard
deviation shock to an index of domestic politicalrisks, which is a low probability risk in the EAP
region, reduces emerging market and developing
economy (EMDE) investment growth by about 2
percentage points within a year (Chapter 3, Box2). A similar shock to uncertainty in majoradvanced economies could roil financial markets(Figure 2.1.6). Furthermore, should theuncertainty in major economies materialize into
an actual slowdown in activity, the outlook for
EAP growth would weaken as trade declines andfinancial flows slow.

2015

Indonesia

Commodity
exporters

C. Currency changes against the U.S.
dollar30

Net capital flows

Q1 2016

Commodity
importers

Malaysia

Vietnam

China

Philippines

-6

2014

4
-1

Percent of GDP
4
Current account
3
2
1
0
-1
-2
-3
2013

2013-15
1990-08

9

Risks
Risks to the baseline forecast have tilted further tothe downside since June. They include heightened
policy uncertainty in the United States andEurope amid mounting protectionist pressures,financial market disruptions, and growth
disappointments in major economies.

2012
2016Q1-Q3
2003-082012

Percent of GDP
14

ThailandThe outlook for the small Pacific Island countries
depends on the development of regional fisheries
and growth in tourism. They remain vulnerable torisks arising from natural disasters, climate change,
terms-of-trade shocks, and sharp declines in FDI.

2011

A. Current account balances

Philippines

remittances, and strong revenue from services
exports. In Vietnam, output is expected to expand
at an average of 6.3 percent in 2017-19, with all
categories of demand buoyed by strong FDI andmanufacturing exports. Growth prospects are alsostrong in Cambodia. Growth will ease only
slightly, and will remain around 6.9 percent in
2016–18, supported by strong garment exports,
and real estate and construction activities.

87

EAST ASIA AND PACIFIC

88

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.5 Vulnerabilities
In China, a sharp increase in house prices, particularly in first-tier cities,
raised financial stability concerns. Foreign currency reserves are generally
adequate but, in a few cases, foreign indebtedness is high. Stocks ofoutstanding domestic debt remain elevated in China, Malaysia, andThailand.
A. Housing prices in China

B. Total debt and real GDP growth in
China

Percent, year-on-year

1st tier
1st tier (excl. Shenzhen)
2nd tier
3rd tier
Dash line: 2011-16 average

40
30Percent of GDP

Percent, year-on-year

Debt

300

GDP growth (RHS)

16

250

14

200

20

12

150

10

10

100

2015

2016

LAO

VNM

CHN

-4
-8
-12

Percent of GDP

Percent
391.4

Lao, PDR

CHN

Thailand2012
2016Q2

PHL

China

2012
2016Q2

THA

0Philippines

2012
2016Q2IDN

25
Vietnam2012
2016Q2

MYS

50

Cambodia

2012
2016Q20Percent of GDP

75

Indonesia

15

Policy challenges
Robust growth has lifted regional GDP well above
its pre-crisis level, and China has made progress inrebalancing.
However,heightened
policyuncertainty, including trade openness in majoradvanced economies amid rising protectionist
sentiments, would limit the ability of global
demand to continue supporting medium- andlong-term regional growth. Other growth limiting
factors are regional in nature and include acontinued slowdown in China, worsening
demographics in major EMDEs in the region(China, Malaysia, Thailand), and sizable
vulnerabilities in some countries.

Percent of FX reserves
100

Malaysia

30

Percent of total
External debt
Short-term debt (RHS)
70
60
50
40
30
20
10
0

Mongolia

45

2015

Thailand Indonesia

F. External financing needs

60

2016f

2007
2015
2016Q2

Malaysia

E. External debt

75

2014

2013

2012

2011

2007
2015
2016Q2

China

IDN

KHM

PHL

2010

2007
2015
2016Q2

Deterioration

-20
THA

2009

MNG

-16

Improvement

Public debt
Household debt
Corporation debt
Peak

Percent of GDP
280
240
200
160
120
80
40
0

2007
2015
2016Q2

2009

0

MYS

2008

6

D. Total debt

C. Fiscal balances
Percent of GDP

8

0
2007

Mar-12
Jul-12
Nov-12Mar-13
Jul-13
Nov-13Mar-14Jul-14
Nov-14Mar-15
Jul-15
Nov-15Mar-16
Jul-16
Nov-16

-10

50
2006

0

similar to the episodes in August 2015 andJanuary-February 2016 when capital inflows to
the EAP region fell. Abrupt deterioration offinancing conditions would lead to higher debtservice burdens and increased debt-rollover risks.
The large, financially integrated economies in theregion with sizable external, foreign-currencydenominated, and/or short-term debt—such as
Malaysia and, to a lesser degree, Thailand—would
be most exposed. There is a risk of financial stressamong corporates and households, which could
spill over to the banking sector.

Sources: Bank of International Settlements, Haver Analytics, International Monetary Fund, Quarterly
External Debt Statistics, World Bank.
C.E. MYS = Malaysia, PHL = Philippines, THA = Thailand, KHM = Cambodia, LAO = Lao, PDR, VNM= Vietnam, IDN = Indonesia, CHN = China, MNG = Mongolia.
D. Peak data for China is in 2016, Malaysia in 2015, Thailand in 1997, and Indonesia in 2001.
E. For Malaysia, short-term debt data is for 2015Q4, 2016Q2 data is not available.
F. The data are from 2016. External financing needs for Mongolia is 391.4.

Against this backdrop, the region faces three main
challenges: completing China’s transition to aslower but more sustainable and balanced growth
path; addressing fiscal and financial imbalancesacross the region to further boost its resilience inthe face of heightened global uncertainty; andimplementing structural reform that help in
overcoming concerns about aging populations,weak external demand, and rising protectionist
sentiments.
China’s transition

spillovers from China would be more pronounced
if growth shocks are amplified by deteriorated
confidence (Arslanalp et al. 2016; IMF 2016b,
World Bank 2016e).
Finally, the baseline forecast is sensitive to a fasterthan-expected monetary policy shift in the UnitedStates and to changes in global risk aversion. The
latter could trigger financial volatility, perhaps

To complete rebalancing, China would need toadvance reforms in the corporate sector, bringcredit growth to more sustainable levels, andstrengthen its intergovernmental fiscal system. The
process of eliminating excess industrial capacity
could be accelerated and deepened (IMF 2016c).
To facilitate a reallocation of factors of production
toward more productive sectors, and away from

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

stagnating sectors with excess capacity, authorities
should reduce administrative controls in thefinancial sector, in favor of a more market-based
allocation of capital. Reducing high leverage
requires enhanced macro-prudential regulations.
Short-term counter-cyclical fiscal measures may beappropriate, but they need to be undertaken
within a medium-term fiscal consolidation
framework. As the economy rebalances, lower
public investment at the subnational level
could make it easier for local governments tomanage debt, including contingent liabilities from
off-budget activities (Jin and Rial 2016).
Institutional reforms—such as better corporate
governance, enhanced auditing and accounting
standards, and stronger regulatory frameworks—
are also needed. The reforms of state-owned
enterprises (SOEs) could be accelerated over time:
sectors dominated by SOEs would benefit from
opening up (Leutert 2016); their traditional
privileges could be eliminated to ensure a levelplaying field; and inefficient SOEs could be closed
in an orderly way.

FIGURE 2.1.6 Risk of uncertainty in major advanced
economies
Risks to the baseline forecast have tilted further to the downside sinceJune reflecting heightened policy uncertainty in the United States andEurope. A confidence shock in major advanced economies, still the main
trading partners for many EAP countries, could further dent regional
investment growth, which is already below the long-term average.
A. Share of major economies in world
economy, 2010-15
Percent of total
U.S.
China

100

EU

Japan

Other

80

A rebalancing of public expenditures and greaterpublic-private cooperation will help addressinfrastructure deficits (Box 2.1.1). For
infrastructure investment to be productive,
reforms are needed to make the public sector more
effective. These include developing andimplementing
rigorous,transparent,
andaccountable processes for project selection,
appraisal, procurement, and evaluation, as well as
improved processes for operating and maintaining
assets. Better fiscal institutions would provide a
firm basis for such reforms (IMF 2016b).

Percent of total
U.S.
China

EU

Japan

Other

80

60
60

40
20

40

0
GDP GDP Trade Foreign Stock(market (PPP)
claims market
exchange
capitalization
rates)

20
0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

C. Largest trade and financial
exposures to major advanced
economies, 2010-15

D. Impact of 10 percent increase in
VIX on EMDE investment growth

Percent of GDP
30

Percentage points
0.0

20

European Union
United States

-0.5
-1.0
Malaysia
ThailandPhilippines
Indonesia
VietnamVietnamPhilippines
Fiji
Cambodia
Thailand0Cambodia
Vietnam
Malaysia
ThailandChina

EAP countries face a variety of fiscal challenges.
Medium-term fiscal consolidation is needed torebuild the policy buffers in a majority ofcountries (Indonesia, Lao PDR, Malaysia,
Mongolia, Papua New Guinea, Vietnam). Thiscan be achieved through improved revenue
mobilization (Cambodia, Indonesia, Lao PDR,
the Philippines), reduced dependence on revenue
from energy sectors (Malaysia, Mongolia, Papua
New Guinea), and improved public expenditure
efficiency (Indonesia, Lao PDR, Vietnam).

B. Trade and financial exposures tomajor advanced economies, 2010-15
average10010Addressing imbalances

89

EAST ASIA AND PACIFIC

Exports

FDI

Remittances

-1.5
-2.0
1

2

3

4
5
Quarter678Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, WorldBank.
A. Trade (A) includes both exports and imports. Exports (B) includes goods exports only. Foreign
claims refer to total claims of BIS-reporting banks on foreign banks and nonbanks. Stock market
capitalization is the market value of all publicly-traded shares. “U.S.” stands for United States; “EU”
stands for European Union. FDI data only available to 2014.
C. Goods exports to the United States/European Union, remittances from the United States/European
Union, and FDI from the United States/European Union (all in percent of GDP). Chart shows only thecountries with the largest exposures to the United States and European Union. For exposures toremittances, some countries such as Samoa and Tonga also have the highest remittance to GDP
ratios worldwide. FDI data are FDI stock.
D. Cumulative responses of EMDE investment to a 10 percent increase in the VIX. Solid lines
indicate the median responses and the dotted lines indicate 16-84 percent confidence intervals.
Vector autoregressions are estimated for the sample for 1998Q1-2016Q2. The model includes, in thisorder, the VIX, MSCI Emerging Markets Index (MXEM), J.P.Morgan Emerging Markets Bond Index(EMBIG), aggregate real output and investment growth in 18 EMDEs with G7 real GDP growth, U.S.
10-year bond yields, and MSCI World Index as exogenous regressors and estimated with two lags.

For commodity producers (Indonesia, Malaysia,
Mongolia, Papua New Guinea), the new era oflower commodity prices underscores the need toenhance fiscal frameworks and improve theoperations of institutions that manage commodity
price volatility, such as sovereign wealth funds.
Reforms to state-owned enterprises—for example,
measures that enhance transparency andgovernance—could reduce pressure on fiscal
resources (Thailand, Vietnam). In the Philippines

90

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.7 Spillovers from the United States and theEuro Area
A slowdown in U.S. or Euro Area output growth would reduce output
growth in EMDEs considerably. EMDE investment would respond morestrongly, possibly reflecting investor concerns about long-term growthprospects.
A. Output growth: Impact of 1
percentage point slowdown in U.S.
output growth on EMDEs

B. Output growth: Impact of 1
percentage point slowdown in EuroArea output growth on EMDEs

Percentage points
0.0

Percentage points
0.5

Structural reforms

0.0

-0.5

-0.5
-1.0

-1.0

-1.5

-1.5

-2.0
-2.5

-2.0
1

2

3

4
5
Quarter

6

7

1

8

2

3

4
5
Quarter678C. Investment growth: Impact of 1
percentage point slowdown in U.S.
output growth on EMDEs

D. Investment growth: Impact of 1
percentage point slowdown in EuroArea output growth on EMDEs

Percentage points
1

Percentage points
1
0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

-5

-6
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter

6

7

in Cambodia, Lao PDR, Mongolia, and Vietnam.
In several countries, including the Philippines,
Cambodia, Thailand, and Vietnam, there issignificant scope to strengthen regulatory oversightand micro-prudential risk management (Abino etal. 2014, IMF 2016 d-g, Ly 2016, World Bank
2016a,b).

Rising international trade has been an importantdriver of growth in EAP region. The region took
full advantage of globalization, opening up
its economies to trade and foreign direct
investment, and exploiting competitive advantages
in the manufacturing sector. However, protracted
weakness in advanced economies, stalling trade liberalization, and an increased risk ofprotectionism are dimming prospects for the longrun expansion of trade. In China and several
other major economies, additional limitation to
long-term growth stem from aging populations,slower labor force growth, and slower productivity growth. These factors highlight theimportance of policies that boost domestic sourcesof long-term growth.

8

Sources: Haver Analytics, International Monetary Fund, World Bank.
Notes: Cumulative impulse response of weighted average EMDEs’ output growth (A.B.) or investment
growth (C.D.) at 1-8 quarter horizons to a 1 percentage point decline in growth in real GDP in the
United States (A.C.) and Euro Area (B.D.). Growth spillovers based on a Bayesian vector
autoregression of world GDP (excluding the source country of spillovers), output growth in the source
country of the shock, the U.S. 10-year sovereign bond yield pulse JP Morgan’s EMBI index,
investment (C.D.) or output (A.B.) in EMDEs excluding China and oil price as an exogenous variable.
Solid lines indicate the median responses and the dotted lines indicate 16-84 percent confidence
intervals.

and Thailand, where an expansionary fiscal stancecould be appropriate in the short-term, policies
should also be framed in the overall context of asustainable medium-term fiscal framework.
Addressing financial imbalances and reducing
financial vulnerabilities, including those ofhouseholds and corporates, requires strengthened
macro-prudential frameworks (IMF 2015c; WorldBank 2016a). This will help mitigate the risks inthe event of market turmoil (IMF 2016d; WorldBank 2016a-c). Improved regulatory oversight andsupervision is needed for the nonbank financial
sector (Cambodia, the Philippines, Malaysia,
Thailand). Banking sector reforms rank high for
improving efficiency and the allocation of capital

The region has plenty of potential for decades of
rapid urban development (World Bank 2015a).
Although more than 400 million people moved tocities between 2000 and 2015, the share of people
living in urban centers in the EAP region remains
at 54 percent in 2015 (49 percent excluding
China), and remains well below the advanceeconomy average (80.3 percent) in the majority of
the regional economies (Figure 2.1.8).1 China’s
current urbanization rate is 55.6 percent, with
only 23.7 percent of China’s population in urban
agglomerations compared to 45.3 percent in the
United States. An increased urban share of the
population can lift GDP per capita and support
convergence of the region with advanced
economies.2 Mutually supporting measures thatencourage private sector investment and public
investment in infrastructure and social services can

1The fastest annual rates of urban expansion were in Cambodia,
followed by China and Vietnam.
2There is a direct link between urbanization and income growth(World Bank 2015a).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.1.8 Policy challenges
The region retains significant potential for convergence-driven growth. The
share of people living in urban centers in the EAP region is well below theadvanced economy average. China’s current urbanization rate is 55.6
percent, with only 23.7 percent of China’s population in urban
agglomerations compared to 36.1 percent in OECD country average.
Across the region, there is room to improve business environments andinstitutions.
B. Population in urban settlements ofmore than 1 million inhabitants

A. Urbanization rate
Percent
100

Percent
2000

2010

2015

OECD
50

80

Percent

2000
2015
U.S.

2010
OECD
2000-15 growth (RHS) 4

40

60

3

30

40

2

20

Indonesia

Cambodia

VietnamThailandPhilippines

Malaysia

China

Tonga

Cambodia

VietnamIndonesia

Malaysia

Myanmar0Lao, PDR

0

Thailand

10
Philippines

10
China

20
Mongolia

C. Ease of doing business, EAP

D. Ease of doing business, China

Score
100

Score
100
90
80
70
60
50
40

Lower non-tariff barriers would further expand
global and regional trade and improve theinternational allocation of investment, thereby
boosting productivity and competitiveness. In
particular, barriers to services trade remain
elevated for many countries of the region(Indonesia, Malaysia, the Philippines, Thailand).
Restrictions on foreign control and ownership,discretionary licensing, and limits on theoperations of foreign companies have significant
negative impacts on the delivery of services across

Regional partnerships and trade agreements,
including the ASEAN economic community
and the proposed Regional Comprehensive
Economic Partnerships, will help stimulate
structural reforms and promote stable income
growth. These partnerships can also help theregion to mitigate the impact of risingprotectionism, resist pressures for protectionist
measures, and boost the region’s resilience, as it
did during both the Asian financial crisis in 1997
and global financial crisis in 2008-09.

Electricity

Trading

Property

2015
2015 Overall

Business

0
Philippines

20Indonesia

420
Vietnam

6

40

China

60

Thailand8

Malaysia

80

Contracts

2017

2017
2017 Overall

Insolvency
Construction
permits
Minority
investors

borders. In addition, foreign entry restrictions insome EAP countries are prohibitive for many
professional services such as legal, accounting, orengineering.

2010

CreditScore
Improvement (RHS) 10

Complementary reform priorities include
improvements in the business climate andreductions in the cost of Doing Business(Cambodia, Lao PDR, Myanmar, Papua New
Guinea, Timor-Leste, and the small PacificIslands; ADB 2016). Cambodia, Lao PDR,
Myanmar, Papua New Guinea, and the Solomon
Islands rank particularly low on the 2015
Corruption Perception Index reported byTransparency International and other governanceindicators. Enhanced transparency, strengthened
accountability, and more responsiveness of state
institutions to the needs of the private sector
would bolster investor confidence. High-quality
education would raise labor-force skills, andpromote productivity growth. Reforms that reducebarriers to females in the workplace are aneffective way to increase participation rates andproductivity.

Taxes

facilitate inclusive and sustainable urban growth.
National urbanization strategies could lead tomore livable environments in high-density urban
areas, making land more accessible and on afair and transparent basis. Governments canencourage facilities that deal with the needs ofrecent migrants. Well-coordinated urban services
across municipal boundaries would reduce
metropolitan fragmentation (ADB 2016; Creehan
2015; Bryson and Nelson 2016; World Bank andDevelopment Research Center of the StateCouncil, China 2014). With the large share of theworkforce in the region still engaged inagriculture, future gains from structuraltransformation could be substantial. At the sametime, continued reforms in the sector are needed
to create opportunities for the rural population
both within and outside farming.

91

EAST ASIA AND PACIFIC

Sources: World Development Indicators, World Bank; Doing Business 2017, World Bank.
C.D. The distance to frontier score helps assess the absolute level of regulatory performance overtime. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents thelowest performance and 100 represents the frontier.
C. For Thailand, the score in 2017 declined so the improvement data is not showed.
D. Business means Starting a business, Contracts means Enforcing contracts, Property means
Registering property, Trading means Trading across borders, Electricity means Getting electricity,
Taxes means Paying taxes, Credit means Getting credit, Insolvency means Resolving insolvency,
Construction permits means Dealing with construction permits and Minority investors means
Protecting minority investors.

92

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.1.1 East Asia and Pacific forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

EMDE EAP, GDPa

2018

2019

2015

2016

Projections

6.7
6.5
6.3
6.2
6.1
6.1
0.0
(Average including countries with full national accounts and balance of payments data only)b

EMDE EAP, GDPb
GDP per capita (U.S. dollars)

2017

2018

(percentage point difference
from June 2016 projections)

0.0

0.0

0.0

6.7

6.5

6.3

6.2

6.1

6.1

0.0

0.0

0.1

0.0

6.0

5.7

5.7

5.5

5.5

5.5

0.0

0.1

0.0

0.0

6.6

6.4

6.3

6.1

6.1

6.1

0.0

0.0

0.0

0.0

Private consumption

7.9

7.1

6.9

7.0

7.0

7.0

0.1

0.0

0.0

0.0

Public consumption

3.0

6.3

6.1

5.9

5.8

5.8

-0.1

0.0

0.0

0.0

Fixed investment

6.7

6.6

6.4

6.2

5.7

5.7

0.0

0.0

-0.1

0.0

Exports, GNFSc

5.2

2.6

3.3

4.3

4.8

4.8

0.1

-0.1

0.0

0.0

Imports, GNFSc

4.5

2.3

3.9

4.7

5.4

5.4

0.2

-0.1

-0.1

0.0

Net exports, contribution to growth

0.3

0.2

-0.1

0.0

-0.1

-0.1

0.0

0.0

0.0

0.0

PPP GDP

Memo items: GDP
East Asia excluding China

4.7

4.8

4.8

5.0

5.2

5.2

0.0

0.0

0.1

0.0

China

7.3

6.9

6.7

6.5

6.3

6.3

0.0

0.0

0.0

0.0

Indonesia

5.0

4.8

5.1

5.3

5.5

5.5

0.0

0.0

0.0

0.0

Thailand

0.8

2.8

3.1

3.2

3.3

3.4

0.0

0.6

0.5

0.3

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa
and Democratic People's Republic of Korea.
b. Sub-region aggregate excludes American Samoa, Democratic People's Republic of Korea, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Palau, Papua
New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components.
c. Exports and imports of goods and non-factor services (GNFS).
For additional information, please see www.worldbank.org/gep.

TABLE 2.1.2 East Asia and Pacific country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections

Cambodia

7.1

7.0

7.0

6.9

6.9

6.8

0.0

0.1

0.1

0.1

China

7.3

6.9

6.7

6.5

6.3

6.3

0.0

0.0

0.0

0.0

Fiji

5.3

4.1

2.4

3.9

3.7

3.5

0.1

0.0

0.1

0.2

Indonesia

5.0

4.8

5.1

5.3

5.5

5.5

0.0

0.0

0.0

0.0

Lao PDR

7.5

7.4

7.0

7.0

6.8

7.2

0.4

0.0

0.0

0.0

Malaysia

6.0

5.0

4.2

4.3

4.5

4.5

0.0

-0.2

-0.2

-0.2

Mongolia

8.0

2.3

0.1

2.0

3.5

3.7

0.0

-0.6

-0.7

-2.7

Myanmar

8.0

7.3

6.5

6.9

7.2

7.3

0.3

-1.3

-1.5

-1.1

Papua New Guinea

7.4

6.8

2.4

3.0

3.2

3.0

-1.8

-0.6

-1.1

0.3

Philippines

6.2

5.9

6.8

6.9

7.0

6.7

0.1

0.4

0.7

0.8

Solomon Islands

2.0

3.3

3.0

3.3

3.0

3.0

0.0

0.0

0.0

0.0

Thailand

0.8

2.8

3.1

3.2

3.3

3.4

0.0

0.6

0.5

0.3

Timor-Lesteb

5.9

4.3

5.0

5.5

6.0

5.5

0.0

0.0

0.0

0.5

Vietnam

6.0

6.7

6.0

6.3

6.3

6.2

0.0

-0.2

0.0

0.0

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa and Democratic People's Republic of Korea.
b. Non-oil GDP. Timor-Leste's total GDP, including the oil economy, is roughly four times the non-oil economy, and highly volatile, sensitive to changes in global oil prices and local
production levels.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EAST ASIA AND PACIFIC

BOX 2.1.1 Investment developments and outlook: East Asia and PacificInvestment growth in the East Asia and Pacific (EAP) region has been stronger than in the average EMDE but has declined
steadily over the past decade. Following a decline in 2010-14, investment growth in the East Asia and Pacific (EAP) region has
since stabilized. To a large extent, the deceleration represents an necessary adjustment from previously elevated growth rates, whichwere temporarily boosted by the post-crisis government stimulus. In China, this process has involved economic rebalancing towards
domestic consumption and the services sectors. In other economies, adjustment to lower commodity prices has been a factor.
Investment needs remain sizable across the region, reflecting significant demographic and income shifts, and rapid urbanization.
During 2010-15, East Asia and Pacific accounted foralmost one-half of the growth in global investment, andone-quarter of the global level. Investment growth has
steadily declined from 12.1 percent in 2010 to 6.5 percent
on average in 2015-16—well below the double-digit rates
of 2003-2008. The slowdown has been broad based andreflected decelerating public as well as private investment.
This box discusses the following questions.
•

How has investment growth in the region evolved?

•

What are the remaining investment needs?

•

Which policies can help address investment needs?

The slowdown in investment growth in the EAP region
was concentrated in China and commodity exporters. To
some extent, the deceleration represents a necessary
adjustment from high pre-crisis growth rates and the postcrisis policy stimulus. The process has involved economic
rebalancing, from manufacturing industry to services, andfrom investment (in excess of 40 percent of GDP) andexports to domestic consumption. In other economies, thecycle in commodity markets, from a decade of high prices
to recent weakness, has been a factor. Despite several
decades of rapid investment growth, requirements in theareas of transport, health and education, andenvironmental protection, remain sizable across the region.
How has investment growth in the region evolved?
Investment growth in East Asia and Pacific has steadily
declined—from 12.1 percent in 2010 to 6.5 percent on
average in 2015-16. This is well below the region’s doubledigit growth rates of 2001-2008, but higher than in other
EMDE regions. The slowdown was particularly
pronounced in China (Figure 2.1.1.1). It reflected adeceleration in the public as well as the private sector, as
the coordinated fiscal stimulus following the global
financial crisis was unwound (especially in China).
In China, investment growth slowed sharply from a 22.8
percent peak in 2009 to 6.5 percent on average in 2015Note: This box was prepared by Ekaterine Vashakmadze. Research
assistance was provided by Liwei Liu.

16. The deceleration reflected a rebalancing towards moresustainable growth. The rebalancing of the economy has
involved a shift from capital accumulation (in excess of 40
percent of GDP) and exports to domestic consumption,and from manufacturing industry to services. By 2015-16,
the drivers of investment growth have changed (Box 3.3).
Large debt stocks resulting from record-high credit growthin 2010-13 continue to weigh on investment growth.
Nevertheless, China’s investment rate remains elevated at
43 percent of GDP in 2016.
Until 2015, commodity importers other than China faced
investment headwinds from tight monetary, fiscal, andprudential policies that were designed to contain rapid
credit growth. Also, the uncertainty due to politicalproblems in Thailand and delays in investment projectapprovals in the Philippines held back investment in thesecountries.
In commodity exporters in the region, investment growthslowed sharply during 2012-14. In large commodityexporting economies (Indonesia and Malaysia), thisslowdown mainly reflected policy tightening in response tofinancial market stress during the 2013 Taper Tantrum,and to weaker terms-of-trade as a result of declines incommodity prices (especially raw materials, fertilizers,
metals and minerals) from their early-2011 peaks. In
smaller, more heavily commodity-dependent economies,
investment contracted as foreign direct investment formining sector projects declined, and as domestic policies
tightened sharply in response to balance of payments stress(World Bank 2015b).
Since 2015, investment growth has begun to recover in the
EAP region, with the exception of China, where itstabilized at around 6.5 percent. This has reflected anumber of developments: stabilizing commodity prices;more accommodative policies amid low inflation andbenign global financial conditions; and buoyant foreign
direct investment inflows (FDI). Various factors
contributed to the increased FDI: a reduction of politicalturbulence in Thailand; improved prospects for electronics
manufacturing under WTO membership for Vietnam; andthe opening up in Myanmar that began in 2011. In China,
the composition of FDI has shifted from manufacturing—93CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.1.1 Investment developments and outlook: East Asia and Pacific (continued)
FIGURE 2.1.1.1 Investment growth
Investment growth in the EAP region has stabilized at moderate levels in 2015-16 following a gradual decline in 2010-13. Thisdecline reflected a steady slowdown in China and a sharp deceleration of investment growth in commodity exporters throughend-2013. Since early-2014, investment growth has begun to recover in major commodity exporters as their terms-of-tradebottomed out and major central banks embarked on easing cycles. Foreign direct investment (FDI) to the EAP region
remained buoyant and supported investment growth.
A. Investment growth

B. Investment growth

Percent, year-on-year

Percent
16

16

EAP

EAP ex. China

EMDE

12

C. Terms of trade change

1990-2008 avg

Percent
6

2003-08 avg

12

4

8

2

4

0

0

-2

D. Monetary policy rates
Percent
16

2000-05
2011-12
H1 2016

12

EMDE

2012

2010

2014

2012

2010

2014

EAP ex.
China

2014

EAP

2012

2010

2016Q3

2016Q1

2015Q3

2015Q1

2014Q3

2014Q1

2013Q3

2013Q1

2012Q3

2011Q3
2012Q1

2011Q1

2010Q3

2010Q1

0

2014

2010

4

2012

8

-4

China

-6

E. FDI: Groups
Percent of GDP
2011
2015
4

2006-08
2013-15
H2 2016

Commodity exporters
Commodity importers

2010

2011

2012

2013

2014

2015

F. FDI: Countries

2012
1990-082013
2003-08

2014

Percent of GDP
122015
Difference from 1990-08 average
7

8

3
2

2

PLW

PNG

MNG

IDN

PHL

THA

MYS

Commodity exporters Commodity importers
ex. China

VNM

-8

0

MMR

ThailandPhilippines

VietnamCommodity importers

-3

1

LAO

Commodity exporters

China

Malaysia

Indonesia

0

KHM

4
Mongolia

94

Sources: Haver Analytics; International Monetary Fund; United Nations Conference on Trade and Development; World Bank; World Development Indicators, World Bank.
A. GDP-weighted averages.
C. Investment-weighted averages. Commodity exporters include Indonesia, Malaysia, Myanmar, and Papua New Guinea. Commodity importers include Cambodia, thePhilippines, Thailand, and Vietnam. An increase denotes an improvement in terms-of-trade.
D. Policy rates are the average of end-of-period data.
E. FDI inflows. Weighted averages.
F. For difference from 1990-14 average, positive values indicate improvement of FDI inflows. LAO = Lao, PDR, KHM = Cambodia, VNM = Vietnam, MMR = Myanmar,
MYS = Malaysia, THA = Thailand, IDN = Indonesia, PHL = Philippines, MNG = Mongolia, PNG = Papua New Guinea, PLW = Palau.

held back by rising wages and production costs, especiallyin coastal regions—towards services, and from lower valueadded products towards higher value-added products suchas cars (UNCTAD 2016).
What are the remaining investment needs?
Infrastructure needs and priorities. Income and demographic
shifts, and rapid urbanization are the three main forces
driving investment needs in the region (World Bank
2015c, 2016f). Rapid urbanization, large-scale migration,and population aging place heavy strains on urban
infrastructure for housing, transportation, healthcare, andeducation. Meeting the growing demands requires
choosing a balance between economic growth andenvironmental protection (ESCAP 2015).1 Estimates ofcosts vary widely (Inderst 2016; Bhattacharyay 2012;
McKinsey 2014; HSBC 2013). The largest costs involve
road construction and upgrading, energy infrastructure,and real estate development (HSBC 2013; McKinsey
2014; Deutsche Bank 2016). The region shows asignificant disparity in density and quality of transport
networks, electricity provision and housing, with greater
gaps in China, Indonesia, and lower-income ASEAN
economies (primarily because of large landmass andpopulation size). There is substantial demand for
1For example, in addition to 170 cities in China with populations
exceeding 1 million, China is expected to gain 292 million city-dwellers
by 2050 (World Economic Forum 2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EAST ASIA AND PACIFIC

BOX 2.1.1 Investment developments and outlook: East Asia and Pacific (continued)
FIGURE 2.1.1.2 Investment growth slowdown and investment needs
In 2014, virtually all EAP economies recorded investment growth below their long-term average, mainly reflecting weak
private investment. A rebound of investment in 2015 helped, but investment growth remains below its long-term average inmore than half of EAP economies. Long-term forecasts suggest continued weakness in investment growth, while sizable
investment needs remain in infrastructure.
A. Share of countries with weak investment growth

B. Contributions to investment growth

Percent

Percentage points
14

Below long-term average

100

Contracting

PublicPrivate

12
10

75
8
6

50

4
2
0

25

2010

2011

2012

2013

2014

2015

Commodity exporters

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

0

2011

2010

-2

Commodity importers

C. Long-term investment growth expectations

D. Infrastructure investment needs , East and Southeast Asia

Percent
8

Percent of GDP
4

7
3

6
5

2

4
3

1

2
1
0
Energy

0
2010

2011

2012

2013

2014

2015

2016

Transport

Telecoms

Water and
Sanitation

Sources: Battacharya (2012), China Economic and Industry Data Database (CEIC), Consensus Economics, General Statistics Office of Vietnam, Haver Analytics, Inderst(2016), Investment and Capital Stock database, International Monetary Fund, World Bank.
A. Share of countries in EAP region with investment growth below the long-term (1990-2008) average or negative investment growth (“Contracting”).
B. Weighted averages of gross fixed capital formation growth rates in the public and private sectors, respectively, in constant 2005 U.S. dollars. The sample includes nine
EAP economies.
C. Five-year ahead consensus forecasts made in the year denoted. Weighted average.

upgrading and maintenance of infrastructure in otherregional economies, including Malaysia, the Philippines,
and Thailand.

networks, power, water, and other facilities remains achallenge across much of the region (Figure 2.1.1.2).

Infrastructure upgrades and challenges. Despite some
remarkable successes, providing adequate transport

Infrastructure projects underway. Extensive construction
activities are underway in the region (BMI 2016).
Transport, especially rail, accounts for the largest share.

95

96

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.1.1 Investment developments and outlook: East Asia and Pacific (continued)
FIGURE 2.1.1.3 Infrastructure indicators
Despite significant progress, in general, providing adequate transport networks, power, water and other facilities remains achallenge across much of the region. EAP regional economies are confronted by environmental problems that threaten toundermine future growth and regional stability.
A. Ranking of overall infrastructure
Ranking

2011-12

140
120
100
80
60
40
20
0

C. Population living in slums

B. Environmental performance
Index

2016-17

2010

2014

60

Percent of urban population
Latest EAP
60

LAC

SAS

50
40

40

30
20

20

10

2007

2016-17

OECD

U.S.

Indonesia

Thailand

China

VietnamPhilippines

MyanmarMongolia

MyanmarCambodia

China

Lao, PDR

Indonesia

Philippines

VietnamThailandE. Air pollution, mean annual exposure:regions

F. Air pollution, mean annual exposure:countries

Micrograms per cubic meter
50
LatestMicrograms per cubic meter
60
1990
Latest

World

OECD

U.S.

50

40

40

30

30

20

20
10

Fiji

Mongolia

Philippines

Malaysia

Indonesia

Cambodia

Thailand

Vietnam

Myanmar

LAC

ECA

SSA

MENA

EAP

China

0

0

SAS

Lao, PDR

Philippines

Vietnam

Cambodia

Indonesia

Thailand

10

China

Malaysia

Score
7
6
5
4
3
2
1
0

Malaysia

Mongolia

Philippines

Vietnam

CambodiaLao, PDR

Indonesia

China

Thailand

Malaysia

D. Quality of port infrastructure

Cambodia00Sources: Environmental Performance Index; World Economic Forum; World Development Indicators, World Bank.
A. Ranking of 140 countries according to the quality of their infrastructure. 1= the best, 140 = the worst.
B. The Environmental Performance Index (EPI) is constructed through the calculation and aggregation of 20 indicators reflecting national-level environmental data, includingchild mortality, wastewater treatment, access to drinking water, access to sanitation, and air pollution average exposure to PM2.5. These indicators use a “proximity-to-target”
methodology, which assesses how close a particular country is to an identified policy target. Scores are then converted to a scale of 0 to 100, with 0 being the farthest fromthe target (worst observed value) and 100 being closest to the target (best observed value).
C. Latest data are as of 2014.
D. 1= extremely underdeveloped to 7= well developed and efficient by international standards.
E.F. This measures the average level of exposure of a nation's population to concentrations of suspended particles measuring less than 2.5 microns in aerodynamic
diameter, which are capable of penetrating deep into the respiratory tract and causing severe health damage. Exposure is calculated by weighting mean annual
concentrations of PM2.5 by population in both urban and rural areas. Latest data are as of 2013.
E. SAS is South Asia region; EAP is East Asia & Pacific region; MENA is Middle East & North Africa region; SSA is Sub-Saharan Africa region, ECA is Europe & Central Asia
region, LAC is Latin America & Caribbean region.

falls far short of that in advanced economies.
Infrastructure needs vary considerably across Chinese
regions, and range from high-profile projects (such as
high-speed railways) to installing basic municipal
infrastructure and pollution-reducing or -reversing
technologies (World Bank 2013a, World Bank and
DRC 2014).

The aim is to integrate the region's transport networks,
and to accommodate rapid urbanization.2 These projects
are supported by government initiatives such as the
China's One Belt One Road.
•

China’s highway network more than doubled in size
between 2004 and 2014, and the share of high-speed
railways was boosted from 33 percent to 50 percent of
total railway kilometers. Yet, transport density still

2Planning is underway for high-speed rail across the region, including amajor network expansion in China, projects in Thailand, Indonesia,
Singapore/Malaysia, Lao PDR, and Vietnam.

•

Lack of adequate infrastructure are the main cause ofIndonesia's high logistics costs (around 17 percent ofcompanies’ total expenditure). Transport costs arehigh. About one-quarter of the population ofIndonesia remains without electricity.

GLOBAL ECONOMIC PROSPECTS | JANUARY 201797

EAST ASIA AND PACIFIC

BOX 2.1.1 Investment developments and outlook: East Asia and Pacific (continued)
FIGURE 2.1.1.4 Health and education
East Asia and the Pacific made great progress towards education and human development outcomes, including child survival,
nutrition and education outcomes. Despite the evident progress in the region, some countries still face significant challenges
and serious education and human-resource shortfalls.

Years
85

Latest

OECD

World

EAP

80

World

Score
6

Score
6

Percent
80
70
60
50
40
30
20
10
0

Lao, PDR

Malaysia

VietnamIndonesia

Philippines

China

Latest OECD World EAPThailandMongolia

EAP

VietnamPhilippines

OECD

Cambodia

EMDE

Lao, PDR

CambodiaLao, PDR

Thailand0Philippines

10

Vietnam2

1

Indonesia

3

2

China

4

3

Mongolia

5

4

Malaysia

5

2016-17

Thailand

EAP

Indonesia

OECD

China

EMDE

Papua New Guinea

MyanmarF. Gross enrollment ratio, tertiary

Mongolia

E. Country capacity to retain or attract
talentMalaysia

D. Quality of math and science education

2016-17

EAP

Timor-Leste

Cambodia

Solomon Islands

Indonesia

PhilippinesFiji

Mongolia

Vietnam

China

Myanmar

Papua New Guinea

Cambodia

Solomon Islands

Timor-Leste

Indonesia

PhilippinesFiji

Mongolia

Thailand

Malaysia

0

China

20

60

Vietnam

65
Timor-Leste

MyanmarLao, PDR

Malaysia

Indonesia

Fiji

OECD

40

70

Papua New Guinea

Latest60

75

Mongolia

Percent
80

ThailandOECD World EAPPhilippines

China

LatestSolomon Islands

Cambodia

VietnamThailand

Percent of GDP
14
12
10
8
6
4
2
0

C. Mortality rate, under-5

B. Life expectancy, by country

Malaysia

A. Health expenditure

Sources: Haver Analytics; World Development Indicators, World Bank; World Economic Forum.
A.B.F. Latest data are as of 2014.
C. Probability of dying between birth and exactly five years of age expressed per 1000 live birth. Latest data are as of 2015.
D.E. The score is from 1 to 7. Higher value means the country is in a good performance. The OECD and EMDE average is the simple average of all the countries in thesubgroupings.

•

and airports. About one-quarter of the population
remains without electricity.

In Lao PDR, Cambodia, and Vietnam, investment inbasic road infrastructure is a priority (World Bank andVietnam Ministry of Planning 2016).
•••

In Malaysia, high-profile projects like the expansion of
the public transport system in Kuala Lumpur, andairport and port upgrades, are anticipated to proceed
through 2020. Middle-income ASEAN countries ingeneral, such as Malaysia and Thailand, are still
investing heavily in the rail and public transportsystems.
The Philippines is particularly weak with regard totransport and trade-related infrastructure. It continues
to rank above 100 globally in the overall state of its
infrastructure (World Economic Forum 2015), withparticularly low rankings for the quality of its seaports

In many East Asian countries, about a third of the
population lives in substandard housing (Figure
2.1.1.3).

Education and health care. The region has made great
progress in human development outcomes, including childsurvival, nutrition, and education. Despite this progress,
the region still faces serious education and human-resource
shortfalls (Figure 2.1.1.4).
•

Health care. EMDEs in the EAP region have reduced
child mortality rates by an average of two-thirds
between 1990 and 2015. However, child mortality
rates in Lao PDR, Myanmar, and Papua New Guinea,
and Timor-Leste are still well above global averages.

98

CHAPTER 2.1

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.1.1 Investment developments and outlook: East Asia and Pacific (continued)
In addition, the region has historically faced a highburden of disease from infectious diseases, some ofwhich have potential global reach (e.g., SARS andpandemic influenza). Within a generation, rates of
non-communicable diseases (NCDs) are expected torise, and infectious diseases are expected to remain arisk associated with high population mobility andenvironmental
degradation(Anbumozhi
andPonciano 2015). Adjusting to these long-run trends
will require public investment in basic infrastructure,
education, health and environmental protection.
•

Education. Although enrollment in primary educationin the region is almost universal, there are deficiencies
in student retention (Cambodia, Lao PDR,
Myanmar), quality of education (Thailand, Malaysia,
Vietnam, Cambodia, Lao PDR), and knowledge
gained as measured by literacy rates (Papua New
Guinea, Timor-Leste, Lao PDR, Cambodia).

Environmental challenges. Many countries in the region
are confronted by environmental problems that threaten toundermine future growth and stability. The main
challenges include water management, deforestation andland degradation, air pollution, and climate change (Leeand Pang 2015). In several major cities in China, air andwater pollution presents a growing health risk. Pollution
levels have also risen in Myanmar, Vietnam, Thailand, andCambodia since 2010.
Which policies can help address investment
needs?
Greater spending efficiency will help increase the benefitsof public investment. Private sector participation can help
improve efficiency, and at the same time provide funding.
Several reforms can help realize the potential benefits ofpublic-private-partnerships. Governments can centralize
agencies that coordinate national infrastructure, in
cooperation with the private sector and multilateralagencies. Multilateral Development Banks can work withthe private sector to provide quality and governanceassurances. Standardization and a global “code of conduct”
can enhance confidence in the private sector as a good
partner. This could include a regulatory framework,transparency principles, and a system for dispute resolution(McKinsey 2013).
Confidence in the business environment is central toencouraging private investment. Measures to improve theenvironment include cutting red tape, clarifying laws andregulations, allowing greater market access to foreigncompanies, opening more investment areas to private
enterprise (especially in services sectors), and cutting
financing costs. Reforms to deepen capital markets and tostrengthen banking systems (e.g., through faster and more
effective insolvency procedures) can encourage private
financing.
In education, policy priorities include a focus ondeveloping skills that are a high priority in labor markets,
keeping in mind that requirements differ across country
and sector. Primary and secondary education must focus
on quality and on learning outcomes, and on building
effective educational systems based on autonomy andaccountability. The relevance of higher education,
vocational education, and training can be improved bygiving institutions the capacity and incentives to meetlabor market demand, and by providing information to
improve the matching between job openings and the skillsof prospective workers (World Bank 2014a). In health,ensuring access to good quality services, without imposing
financial hardship, will entail reforms to the insurance
regime, and a shift of focus from hospitals toward highquality primary care.
For environmental sustainability, the complexity ofchallenges underlines that there are no easy or universal
solutions to environmental problems across the region.
However, a number of initiatives would be appropriate.
These include a focus on common benefits; an emphasis
on stakeholder participation; a commitment to scientificand technological research; an emphasis on long-termplanning; reforms to align resource and utilities pricing
with cost, including externalities; improvements ingovernance and general institutional capacity; and astrengthening of regionally coordinated approaches andinternational support (Anbumozhi and Ponciano 2015).
Investment growth in EAP is unlikely to revert to the highrates of the previous decade. Demands for capitalformation in the region will nevertheless remain relatively
high, and governments and multilateral agencies willremain important providers of funding. The establishmentof the Asia Infrastructure Investment Bank provides a newsource of funding. In March 2016, the Japan International
Cooperation Agency signed an agreement with the AsianDevelopment Bank to establish a new $1.5 billion fund tosupport private infrastructure investments across the AsiaPacific region. In order to have the desired impact, it isimportant that investments go to economically viable
projects. Close coordination of regional and global
initiatives will help reduce duplication and inconsistencies
in public investment projects (BMI 2016).

Regional growth accelerated from 0.5 percent in 2015 to 1.2 percent in 2016, in line with expectations, due
mainly to an easing of the recession in Russia as oil prices stabilized. Excluding Russia, regional growth slowed
to 2.4 percent in 2016 from 3.5 percent in 2015, reflecting a slowdown in Turkey amid political uncertainty.
In the eastern part of the region performance was mixed: activity picked up in Ukraine after two years of deep
recession, growth continued to slow in Kazakhstan, and output contracted in Azerbaijan. In the western part of
the region growth generally remained robust, despite moderating in several major countries (Turkey, Poland,and Hungary). Regional growth is expected to rise to 2.8 percent on average in 2018-19, driven mainly by arecovery in commodity exporters and Turkey. Risks remain tilted to the downside, and include the possibility offurther weakness in commodity prices, disruptions in financial markets, slower-than-expected Euro Area
growth, and political uncertainty. Key policy challenges include ensuring macroeconomic stability during theadjustment to lower commodity prices and dealing with sizable macroeconomic and financial vulnerabilities.
Structural reforms would boost potential growth and mitigate the long-term effects of the lackluster external
environment and aging populations.

Recent developments
Regional output is estimated to have expanded 1.2
percent in 2016, following 0.5 percent growth in2015, as the recession in Russia, which accounts
for almost 40 percent of regional GDP, eased(Table 2.2.1). Excluding Russia, regional growthin 2016 declined to 2.4 percent from 3.5 percent
in 2015 as the Turkish economy slowed amid
political uncertainty. Regional activity was
supported by stabilizing commodity prices,
accommodative policies, reduced geopoliticaltensions (Russia, Ukraine), and improved overall
confidence for most of 2016.1
Financial markets, which were generally stable formost of 2016, turned more volatile in the fourth
quarter amid heightened policy uncertainty from
Note: This section was prepared by Yoki Okawa and Ekaterine
Vashakmadze with contributions from Jongrim Ha and Hideaki
Matsuoka. Research assistance was provided by Shituo Sun.
1The eastern part of the region comprises Eastern Europe (Belarus, Moldova, Ukraine), South Caucasus (Armenia, Azerbaijan andGeorgia), Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan,
Turkmenistan, Uzbekistan) and Russia. The western part of
the region includes Central Europe (Bulgaria, Croatia, Hungary,
Poland Romania) and the Western Balkans (Albania, Bosnia
and Herzegovina, Kosovo, FYR Macedonia, Montenegro, Serbia),
and Turkey.

both external (the United States and Europe) anddomestic (particularly Turkey) factors (Figure
2.2.1). Exchange rates and asset prices, which
recouped some of their earlier losses in mid-2016,
came under renewed pressure in the fourth
quarter, especially in several large western
economies with relatively high levels of domestic
policy uncertainty and significant vulnerabilities.
Turkish lira fell to a record low against the U.S.
dollar in December. In contrast, a modest recoveryof commodity prices since November supported
further rebound of exchange rates and asset prices
in energy exporters (Kazakhstan and Russia).
Monetary and fiscal policies followed different
courses in the region. Russia and Kazakhstan cut
their policy interest rates to support activity,
despite above-target or above-trend inflation.
Azerbaijan, where inflationary pressures persisted
throughout 2016, maintained its tight monetarystance. Turkey raised its benchmark rate for the
first time in almost three years in November
2016 amid a depreciating currency and weakexternal demand. Kazakhstan deployed a fiscal
stimulus package equivalent to around 2 percent
of GDP on net. Romania implemented a procyclical value-added tax cut.

100

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.2.1 Growth
Regional growth rebounded in 2016, mainly because of an easing of therecession in Russia. The improved regional performance was supported
by stabilization in financial markets until the third quarter. Growth isexpected to continue to strengthen, led by commodity exporters, but will
likely remain below its long-run average.
B. Currency volatility

C. Growth by sub-regions-4

EasternOct-16

Nov-16

Sep-16

Jul-16Aug-16

Dec-16
2018

-4

2017

0
-2

2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018

0
-2

2016

2

2015

4

2

2014

6

4

2018

6

Western

Turkey2003-08 average 1995-2008 average

2017

Percent8

2016

2003-08 average 1995-2008 average

ECA

PolandD. Growth in commodity exporters
and importers

2015

Percent8

Jun-16

2019

2018

2017

2016

2015

2014

2013

2012

-4

Apr-160-2

May-16

2

RussiaMar-16

4

Index, end 2015=100
180
160
140
120
100
80
60
40
20
0

2014

6

Jan-16EMDE ECA
Commodity exporters
Commodity importers excl. Turkey

Percent

Feb-16

A. Regional economic performance

Commodity exporters Commodity importers

Sources: Bloomberg, World Bank.
A. Weighted averages. Growth is year-on-year percent change. EMDE ECA = emerging market anddeveloping economies in European and Central Asia. Shadow area indicates projections. The sample
includes 24 EMDEs in European and Central Asia.
B. Currency volatility is the 1-month implied volatility for the exchange rate. The volatility of last day in2015 is set to 100. Last observation is December 21, 2016.
C.D. Weighted averages. Year-on-year real growth. Long term average is for 1995-2008.
C. The western part of the region includes Albania, Bulgaria, Bosnia and Herzegovina, Croatia,
Hungary, Kosovo, the FYR Macedonia, Montenegro, Poland, Romania, Serbia and Turkey. The
eastern part of region includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, the Kyrgyz
Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
D. Commodity exporters include Albania, Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Russia,
Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Commodity importers include Bulgaria, Bosnia
and Herzegovina, Belarus, Georgia, Croatia, Hungary, Kosovo, FYR Macedonia, Moldova,
Montenegro, Poland, Romania, Serbia, and Turkey.

In Russia, the output contraction eased to -0.6
percent in 2016, from -3.7 percent in 2015
(Figure 2.2.2 and Table 2.2.2). Russia’scontraction was shallower than projected in June
because of overall accommodative fiscal policy in2016 with the temporary suspension of the fiscal
rule and banking sector capital and liquidity
injections (IMF 2016h; World Bank 2016g). The
flexible exchange rate, which depreciated in realeffective terms from 2014 to early 2016, was also asupporting factor. Investment bottomed out fasterthan expected, as firms started rebuilding
inventories, and the contraction in consumption
eased as inflation declined to pre-crisis levels.

Growth slowed to 0.9 percent in Kazakhstan andthe output contracted in Azerbaijan. The erosionof foreign exchange reserves in an attempt tosupport their currencies, following the commodity
price bust, led to the abandonment of fixedexchange rates in favor of a float in Kazakhstan
and a managed float in Azerbaijan (Horton et al.
2016; IMF 2016i). The acute phase of the shockmight be over in both countries. However, activity
in these countries have been held back bycontractions in non-oil activity, particularly theservices sector (Kazakhstan) and construction(Azerbaijan), which had previously been supported
by public investment (IMF 2015b). Weak growthin Russia, Azerbaijan, and Kazakhstan continues
to weigh on Central Asia and the South Caucasus.
Growth has remained below long-term trends inArmenia, Georgia, the Kyrgyz Republic, andTajikistan in 2016.
Growth in Eastern European sub-region isbottoming out after two years of sharp recession.
Ukraine grew by 1 percent in 2016, a broad-based
recovery from the almost 10 percent contraction
in 2015. This reflected an easing of the conflict ineastern Ukraine, along with the impact ofsignificant reforms undertaken during 2014-15 tostabilize the economy and reduce large imbalances.
The Second Review of the IMF program wasapproved in September 2016, which helped torelease some previously committed donor funds.
Inflation has remained below 15 percent sinceApril, and the exchange rate has stabilized since
September. Growth in Moldova bottomed out,
and the contraction in Belarus eased, partly
because of the recovery in Russia and Ukraine.
Activity in the western part of the region, which iscomprised of commodity importers that are moreclosely linked to, or are members of, the European
Union (EU), has generally remained robust.
Growth accelerated in Albania, Croatia, Romania,
and Serbia reflecting strong domestic demand
supported by low energy prices, faster investment
growth helped by the disbursement of EU
structural funds, labor market improvements,
particularly in Albania, and the VAT tax cut inRomania. Strong exports of goods and services tothe Euro Area were additional supportive factors
in Croatia and Romania. In contrast, easing of

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EUROPE AND CENTRAL ASIA

domestic demand weighed on growth in Hungary,
Poland, and Turkey. In Turkey, activity
contracted in the third quarter of 2016, for the
first time since 2009, in the wake of the failed
coup attempt and resulting deterioration ofbusiness conditions.

FIGURE 2.2.2 Country developments

Vulnerabilities

A. Russian Federation

Recessions in Russia and Ukraine have bottomed out. In Turkey, sharp
drop in confidence led to a contraction of activity in the third quarter.
Activity moderated in Poland. Growth slowed in Kazakhstan and output
contracted in Azerbaijan, reflecting gradual adjustment to low commodity
prices.

4

Percent, year-on-year
Current account(RHS)
12 Industrial production
9 GDP

2

2

6

8

0

0

3

4

-2

-2

0

0

-4

-4

-3

-4

-6

-6

-6

-8

Russia’s economy will resume growth in 2017, as
the adjustment to low oil prices is completed.
However, in the baseline scenario, growth will
likely remain below the 1995-2008 average of 4.1
percent, partly reflecting persistently low oil
prices. The adjustment to the negative terms-oftrade shock in Azerbaijan and Kazakhstan is

16

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3

12

Percent of GDP
6
4

2

2

0

0

-2

-2

-4

-4

Percent, year-on-year
Current account (RHS)
Industrial production
8
GDP
6
4
2
0
-2
-4
-6

Percent of GDP
12
9
6
3
0
-3
-6
-9

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3

Percent, year-on-year
Current account (RHS)
6 Industrial production
GDP
4Percent of GDP

D. Kazakhstan

E. Ukraine

F. Azerbaijan

Percent, year-on-year
Percent of GDP
Current account (RHS)
Industrial production
6
5
GDP
0
0

Percent, year-on-year
Percent of GDP
Current account (RHS)
10
20
Industrial production
GDP
5
10

-5
-10

-18

-15

-24

-20

0

0

-5

-10

-10

-20

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3

-6
-12

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3Growth in the western part of the region, which is
close to its long-term average, is projected toremain robust. The economies in the east of theregion are expected to continue to strengthen,although growth is projected to remain well below
both long-term and pre-crisis averages. Growth inmajor energy exporters is being held back by
weakness in non-oil sectors (IMF 2015a).

6

C. Poland

Outlook
Growth in the region is expected to accelerate to
2.7 percent on average in 2017-19, driven by arecovery in commodity-exporting economies andimproved confidence. This outlook is predicatedon a continued, but modest, recovery incommodity prices and easing geopolitical tensions.

Percent of GDP

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3

Percent, year-on-year
Current account (RHS)
Industrial production
6GDP
4

B. Turkey

2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3Several countries in ECA have enhanced theirpolicy frameworks and their resilience to external
shocks in recent years, but vulnerabilities in theregion are numerous. Some countries facesubstantial financing needs in excess of reserves.
Albania, Georgia, the Kyrgyz Republic, andTurkey are running current account deficits,
which are often financed by volatile portfolio
flows. Albania, Belarus, Croatia, Hungary,Montenegro, Poland, and Ukraine, are at risk
from elevated sovereign debt levels. Croatia,
Georgia, Kazakhstan, and Turkey have high stocks
of private debt denominated in foreign currencies,
the legacy of rapid credit growth in the aftermathof the global financial crisis.

101

Source: Haver Analytics.
A.-F. Industrial production are year-on-year growth, not seasonally adjusted. Current accountbalances are seasonally adjusted. Last observation is 2016Q3 for Russia, Turkey, Poland, andUkraine. Last observation is 2016Q2 for Kazakhstan and Azerbaijan except industrial production.

projected to level off in 2017, as commodity prices
stabilize and economic imbalances narrow (Figure
2.2.3; IMF 2015d). Further adjustments that are
required in the fiscal and banking spheres
constrain the outlook for investment given thehigh capital intensity of the extractive industry.
Strengthened activity in Russia and Kazakhstan
will support other economies in the region(Armenia, Belarus, the Kyrgyz Republic) through102

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.2.3 Policy responses to lower oil prices andgrowthRussia responded to lower oil prices and international sanctions by
allowing an early and sharp depreciation of its currency. In Kazakhstan
and Azerbaijan, exchange rate adjustments were implemented in late 2015
to early 2016.
A. Real effective exchange rate

B. Inflation

Index, 2010Q1=100
130
RussiaKazakhstan
120

Percent
Russia50

Azerbaijan

C. Fiscal balance

2016Q3

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2013

-10

2010
2011
2012
2013
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3070

2014Q410

80

2014Q320

90

2014Q2

100

2014Q130

D. Real GDP

In Turkey, growth projected to recover to 3.0
percent in 2017 and 3.6 percent, on average, in
2018-19 helped by improved confidence.
However, downside risks to the outlook increased
compared to June, reflecting political uncertainty
and financial market volatility. Growth in Poland
is projected to remain around 3.3 percent in 2017-19, supported by robust domestic demand,
especially private consumption. Weak demand
from main trading partners, including the United
Kingdom and Euro Area, will limit the prospectsof further acceleration.

2016

Risks
2015

-12

Azerbaijan

2014

-8

2013

-4

Kazakhstan

2012

0

2011

Kazakhstan Azerbaijan

4

Index, 2014=100
110
Russia
105
100
95
90
85
80
75
70

2010

Percent of GDP
Balance (RHS) 12
8

2013
2014
2015
2016
2013
2014
2015
2016
2013
2014
2015
2016
RussiaAzerbaijan

40

110

Percent of GDP
50 Revenue Expenditure
40
30
20
10
0
-10
-20
-30
-40
-50

Kazakhstan

for commodity imports. Differences in prospects
among countries stem from domestic factors.
Romania’s strong growth in 2016, boosted by procyclical VAT cut, will stabilize in 2017. In
Hungary, growth is projected to accelerate to 2.7
percent on average reflecting a recovery of public
investment, including the infrastructure projects
financed by EU funds.

Sources: Haver Analytics, International Monetary Fund, World Bank.
B. Inflation is annualized quarter-on-quarter consumer price growth. Last observation is 2016Q3.
C. Revenue is general government revenue; expenditure is general government total expenditure;balance is general government net lending/borrowing.
D. 2016 data are estimates.

rising trade and remittances. Regional integration
initiatives (e.g., the Eurasian Economic Union,
EEU, the European Union, EU) could help.
Among oil importers, output in Ukraine, which
returned to expansion in 2016, is expected to growas the security situation improves and domestic
economic reforms gain traction. Growth in 2017is projected at 2 percent—unchanged from theJune projection. While Ukraine made progress inreforming public finances, debt management,
energy subsidies, and the banking system, efforts
toaddress
government
ineffectiveness,
privatization of state-owned enterprises, andpension reform have been delayed (IMF 2016j).
The outlook for countries in the western part ofregion is mixed. On average, growth is expected toremain steady in Central Europe, despite lower
trading partner growth and gradually rising prices

The risks in the region remains tilted to thedownside. The main risks could come from lower
commodity prices, financial market disruption,
political uncertainty or slower growth in advanced
economies, including Europe and the UnitedStates, and geopolitical uncertainty in the region.
The primary downside risk for Russia and theeastern part of the region is a stalling or reversing
recovery of global energy prices. For energy
exporters (Azerbaijan, Kazakhstan, Russia,
Turkmenistan, Uzbekistan), energy price shocks
could affect macroeconomic stability throughspillovers to other sectors, such as construction
and transportation, fiscal pressures, strains on
the exchange rate, inflation or financial systeminstability. Financial strains and fiscal deterioration could trigger a pro-cyclical policy tightening
to preserve fiscal and reserve buffers, which could
include public spending cuts and policy interest
rate increases. A deeper or longer-than-expected
recession in Russia could generate intensified
spillovers for the rest of the eastern part throughreduced remittance flows and lower demand forexports (Armenia, Belarus, Georgia, the Kyrgyz
Republic, Moldova, Tajikistan, Uzbekistan).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

An escalation of geopolitical tensions would also
set back growth. Risks include rising tensions
in Eastern Ukraine, the conflict in Syria, and therefugee crisis. In Turkey, while a sharp contractionin activity after the failed coup attempt in July is
expected to ease gradually in the baseline scenario,
uncertainty on the future prospect remain elevatedand risks to the outlook are tilted to the downside.
If geopolitical and domestic political tensions
delay the implementation of necessary reforms
and discourage investment, long-term growthprospects would also be adversely affected.

The region, especially its western part, has strong ties with the European
Union. Heightened uncertainty in advanced economies—in Europe orelsewhere—could have significant impact on trade, external balances, andregional growth prospects. A slowdown in U.S. or Euro Area growth would
reduce growth and investment in EMDEs considerably.
A. Trade and financial exposures tomajor advanced economies

B. Trade and financial exposures tomajor advanced economies

Percent of total
US
China

Percent of GDP
80
European Union
60
40
20
0

EU

Japan

Other

80
60
40
20
0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

Despite the recent recovery, growth in the ECA
region remains below trend. In several countries(Belarus, Croatia, Ukraine), GDP is still below
pre-crisis levels. The high volatility of output inthe region hinders its growth prospects (Figure
2.2.6). The key policy challenge for the regionis to lift growth back to a stable trend rate. Thisrequires policies that promote macroeconomic
and political stability, economic diversification,and improved resilience to external headwinds.

Exports

FDI

Remittances

C. Cumulative impact of higher
volatility on EMDE investment

D. Cumulative impact of higher EU
policy uncertainty on ECA investment

Percentage points

Percentage points

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0

-2.0
1

2

3

4
5
Quarter

67

8

E. Cumulative Impact of U.S. growth
slowdown on EMDE countries
Percentage points0

Output growth
Investment growth

1

2

3

4
5
Quarter

67

8

F. Cumulative Impact of Euro Area
growth slowdown on EMDE countries
Percentage points
0

-1

-1

-2

-2

-3

-3

-4

-4

-5

Policy challenges

United States

Moldova
Bosnia & Herz.
Albania
SerbiaMontenegro

100

Hungary
Bulgaria
PolandMacedonia, FYR
Romania

Global policy uncertainty has significantly
increased following the elections in the UnitedStates and the United Kingdom’s decision to leave
the European Union. The region, especially its
western part, has strong ties with the European
Union. Heightened uncertainty in advanced
economies—in Europe or elsewhere—could havesignificant impact on trade, external balances, andregional growth prospects. If this risk materializes,
the scope for the countercyclical policies could be
limited for many countries (Albania, Belarus,
Croatia, Hungary, Montenegro, Russia, Serbia,
Ukraine; Figure 2.2.4, 2.2.5).

FIGURE 2.2.4 Risks of heightened policy uncertainty inmajor advanced economies

Hungary
Bulgaria
PolandMacedonia, FYR
Romania

U.S. monetary tightening could be accompanied
by bouts of heightened risk aversion and financial
stress, which in the past have led to slowinginternational capital flows with damaging
consequences for activity and employment in theregion. The economies with significant externalfinancing needs are particularly sensitive to apotential reversal of capital flows (Figure 2.2.6).

103

EUROPE AND CENTRAL ASIA

Output growth
Investment growth-5
On impact

1 yearOn impact

1 year

Sources: Baker, Davies, and Bloom (2016); Bank for International Settlements; Haver Analytics;
World Bank; International Monetary Fund.
A.B. Foreign claims refer to stock of total claims of BIS-reporting banks on foreign banks andnon-banks. Trade refers to goods exports and imports. Data is average of 2010-15.exports to theUnited States/Euro Area, remittances from the United States/Euro Area, and FDI from the UnitedStates/Euro Area (all in percent of GDP). FDI is stock of total FDI. Figure B. shows only the countries
with the largest exposures to the United States and Euro Area.
C.D. Cumulative impulse response using a vector autoregression for 18 EMDEs for 1998Q1-2016Q2.
Details of the methodology are provided in Annex SF3.2B. Solid lines indicate median responses anddotted lines indicate 16-84 percent confidence intervals. Endogenous variables follow this Choleskyordering, the VIX or Economic Policy Uncertainty (EPU) Index for the EU, EMDE stock price index,
EMDE bond price index, and aggregate real output and investment in EMDEs. Exogenous regressors,
included with two lags, are G7 real GDP growth, world stock price index, and U.S. 10-year bondyields. For the estimation of the impact of EU uncertainty (as measured by the EPU, Figure 2.2.4D),
the sample includes EMDEs in Europe and Central Asia (Bulgaria, Hungary, Poland, Romania,
Russia, Turkey).
E.F. Bars indicate median cumulative impulse responses (vertical lines indicate 16-84th percentile
confidence intervals) from a Bayesian structural vector autoregression for 1998Q1–2016Q2, using
weighted average data for 18 EMDEs. The regression includes, in this Cholesky ordering, weighted
average output growth in major advanced economies and China (excluding either the United Statesor the Euro Area); U.S. or Euro Area output growth; U.S. 10-year sovereign bond yield; JP Morgan’s
EMBI index; and aggregate output growth or investment growth in EMDEs (excluding China).
The oil price growth is included as an exogenous regressor in the model. Details are elaborates
in Annex 3.2C.

104

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017and high risks emanating from elevated foreign
currency-denominated private debt.

FIGURE 2.2.5 Vulnerabilities
External imbalances and fiscal vulnerabilities are elevated in the region.
Short-term financing needs exceed reserves in most countries, particularly
among commodity importers.
A. External financing needs, 2016

B. External debt, 2016

Percent of foreign reserves

Percent of GDP
150

Range

Median

537.1

300
250
200

Range

MedianPercent of total
30

100

20

50

10

0

0

Commodity
exporters

Commodity
importers

C. Fraction of countries with current
account deficit
Surplus

Percent of total

Deficit

External debt

Commodity
importers0

Commodity
exporters

50

Commodity
importers

100

Commodity
exporters

150

Short-term debt (RHS)

D. Fraction of countries with fiscal
deficit100

Percent of total
100

80

80

60

60

40

40

20

20

Surplus

Deficit

0

0
2012

2014

2016

2012

2014

2016

Sources: Haver Analytics, International Monetary Fund, World Bank.
A. External financing needs are defined as amount of external debt repayment, within one year which
includes the short-term and long-term debt, plus current account deficit over foreign reserves.
Number in red (537.1) indicates maximum external financing need in percent of foreign reserves
among commodity exporters.
C.D. Data is for all EMDE European and Central Asia countries whose data are available.

Cyclical policies
Exchange rate flexibility and monetary policy
credibility. For countries hit by large terms-oftrade shocks, especially in the eastern part of
the region, it is critical to employ policies topromote adjustment to the new era of low oil
prices. These include exchange rate flexibility,
policy predictability, and an agile businessenvironment (Svensson 2010; Mollick et al.
2011). The adoption of new monetary policy
frameworks could strengthen policy credibility incountries that have recently allowed moreexchange rate flexibility, such as Azerbaijan andKazakhstan. Safeguarding macroeconomic stability
and managing volatility is important forcommodity importers as well, especially foreconomies closely related to oil-exporting
countries (Armenia, Georgia, Moldova, theKyrgyz Republic). These countries have limitedmonetary policy buffers, high dollarization rates,

Financial-sector risk management. Economies
with high and rising debt, unhedged foreign
liabilities, or heavy reliance on short-termborrowing to fund longer-term investments(Azerbaijan, Hungary, Kazakhstan, and Turkey)
would benefit from stronger risk management(IMF 2016k; Claessens 2015), such as requiring
greater capital and liquidity buffers for financial
institutions exposed to leveraged corporates.
Strengthened
governanceinstate-owned
enterprises can help contain the buildup of
corporate debt. Reforms to insolvency andbankruptcy
laws
would,
among
other
improvements, allow a more rapid and orderly
resolution of distressed companies.
Rebuilding fiscal policy buffers. Improving
macroeconomic
stability
requiresfiscalconsolidation over the medium term. With few
exceptions, commodity importers have limited
fiscal buffers, reflecting elevated government debt
or large deficits. Commodity exporters, who had
smaller deficits than importers, saw a deteriorationin fiscal balances as well as from a decline incommodity-related revenue. Unless severe
downside risks materialize, the priority in many
countries is to rebuild policy buffers andimplement fiscal reforms.
For fiscal consolidation, in addition to reducing
spending, countries need to broaden their tax baseand strengthen tax administration. In Russia, a
gradual increase in revenues would support fiscal
consolidation. In Ukraine, the fiscal outlook
remains challenging, with the general deficit,
including Naftogaz, projected at almost 4 percent
of GDP in 2016. Measures to improve the qualityof public spending, consistent with medium-term
expenditure frameworks, would also beappropriate.
Many commodity-exporting economies in theregion have sovereign wealth funds, which havehelped reduce pro-cyclicality of fiscal policy(Bleaney and Halland 2016; World Bank 2016g).
The rules governing these funds could be
strengthened to ensure greater counter-cyclicality
and intergenerational equity. For example, Russia

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Labor markets. Many countries in the westernpart of the region continue to suffer from doubledigit unemployment rates. This problem
is particularly pronounced in the Western Balkans. Labor market reforms, combined withreforms to improve the business environment,
would boost productivity and job creation(Kovtun et al. 2014). Reforms would enable
existing firms to grow, become more productive,
or exit the market. They would also tap into

B. Government effectiveness, 2015

Average growth in percent
9
8
EAP
7
SAR
6
5
SSA
4
MNA
3
LAC
2

Index
1.0

Range
Median

0.5
0.0
ECA

-0.5

1
0

-1.0
0

1
2
3
Standard deviation of growthCentral Western South Eastern
Europe Balkans Caucasus Europe

4

Index
1.0

Percent of labor force
30

2005

2014

EMDE2014

0.8

25

0.6

20

0.4

15

0.2

10

Range

MedianWestern
Balkans

D. Unemployment rate, 2015

CentralAsia

South
Caucasus

C. Trade concentration

5

CentralAsia

CentralEurope0

EasternEuropePoland0.0

TurkeyDiversification. Hydrocarbons account for morethan 70 percent of goods exports in many
countries in the eastern part of the region(Azerbaijan, Kazakhstan, Russia, Turkmenistan).
Diversification, which is associated with higher
growth and lower output volatility, should rank
high among policy priorities (Papageorgiou andSpatafora 2012; Cavalcanti et al. 2015). The useof revenues from natural resources to build up
infrastructure, advance education, and improve
institutions can promote diversification (Gill et al.
2014). International experience suggests that
reducing commodity dependence can be successful
over time when the government makes anadequate commitment of time and political effort(Indonesia, Malaysia, Mexico; Cherif, Hasanov,and Zhu 2016).

A. Growth level and volatility, 2008-15

RussiaEnhancing productive investment. A sustained
recovery in the region requires strengthening
investment (Box 2.2.1, Chapter 3; World Bank
2015d). However, a legacy of financial imbalances
weighs on investment growth. Policies that boost
private investment, encourage more efficient useof public resources, and effective public-private
partnerships (PPP) will be critical for recovery.
These include reforms to deepen capital markets
and strengthen banking systems, such as throughfaster and more effective insolvency procedures.
Improved coordination and deployment ofexisting regional and global investment initiatives
and funds, including EU structural funds, would
be useful.

GDP growth in the ECA region is the slowest and most volatile among
EMDE regions after the global financial crisis in 2008-09. Low government
effectiveness in some sub-regions and high trade concentration in oil
exporters can be contributing factors to the high volatility. In some
economies, in Western Balkan in particular, lowering high unemployment
rates is one of the key challenges.

Kazakhstan

Structural reforms

FIGURE 2.2.6 Policy challenges

Azerbaijan

established two separately managed wealth funds,
one to facilitate macroeconomic stabilization, andthe other to fund long term pension obligations.

105

EUROPE AND CENTRAL ASIA

Sources: Haver Analytics, United Nations Conference on Trade and Development, World Bank.
A. Mean and standard deviation of annual regional GDP growth rate from 2008 to 2015. EAP = East
Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA =Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. Regional GDP only
includes the EMDE countries.
B. The indicator reflects perceptions of the quality of public services, the quality of the civil service
and the degree of its independence from political pressures, the quality of policy formulation andimplementation, and the credibility of the government's commitment to such policies. The data is for2015. The index ranges from -2.5 (weak) to 2.5 (strong) governance performance.
C. The trade concentration index is a measure of the degree of product concentration of exports from
UNCTAD. An index value closer to 1 indicates higher concentration. EMDE 2014 is the average value
weighted by real GDP for the emerging and developing economies in 2014.
D. Data is for 2015.

entrepreneurship potential, so that new firms
emerge and succeed quickly and inexpensively.
Labor market initiatives could involve educationand training, incentives to be mobile, andregulations eliminating barriers to minorities,
women, youth and older workers. (World Bank
2014b). Better quality education and closeralignment with employers’ needs can reduce
the skill mismatches that contribute tounderemployment (Sondergaard and Murthi2012). Countries could improve their productivity by lowering barriers to service sector
liberalization and by reducing administrative
burdens on businesses.

106

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.2.1 Europe and Central Asia forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates
EMDE ECA, GDPa
EMDE ECA, GDP excl. Russia

2018

2019

2015

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections

2.3

0.5

1.2

2.4

2.8

2.9

0.6

0.0

-0.1

0.0

3.4

3.5

2.4

3.0

3.4

3.6

1.0

-0.5

-0.2

0.0

(Average including countries with full national accounts and balance of payments data only)b

EMDE ECA, GDPb

2.3

0.5

1.2

2.4

2.7

2.9

0.7

0.0

0.0

-0.1

GDP per capita (U.S. dollars)

1.8

0.1

0.9

2.1

2.6

2.7

0.6

0.0

-0.1

0.0

PPP GDP

2.1

0.2

1.1

2.4

2.8

2.9

0.5

0.0

0.0

0.0

Private consumption

1.3

-2.8

2.0

2.6

3.0

3.0

0.2

0.1

0.1

0.0

Public consumption

2.2

1.1

0.7

1.2

1.4

1.4

-0.5

-0.5

0.0

-0.1

Fixed investment

2.0

0.4

0.3

4.6

6.7

5.4

2.5

1.3

0.2

1.0

Exports, GNFSc

2.9

3.0

2.3

3.1

3.4

3.6

0.2

-0.8

-0.5

-0.2

-0.8

-6.2

3.3

4.7

6.2

5.0

0.8

0.0

0.0

-0.1

1.2

2.9

-0.2

-0.3

-0.7

-0.3

-0.3

-0.3

-0.1

0.0

Central Europed

3.0

3.6

2.9

3.1

3.2

3.2

0.2

-0.5

-0.2

0.0

Western Balkanse

0.5

2.3

2.7

3.2

3.6

3.7

0.0

0.0

0.1

-0.1

Eastern Europef

-3.8

-7.7

-0.1

1.3

2.5

2.6

0.1

0.2

0.1

0.2

South Caucasusg

2.7

1.6

-1.2

2.1

3.0

2.9

0.0

-0.7

0.4

0.8

Central Asiah

5.5

3.1

2.8

3.8

4.8

5.1

0.1

0.7

0.4

0.2

Imports, GNFSc
Net exports, contribution to
growthMemo items: GDP

Russia

0.7

-3.7

-0.6

1.5

1.7

1.8

0.0

0.6

0.1

-0.1

Turkey

5.2

6.1

2.5

3.0

3.5

3.7

2.1

-1.0

-0.5

-0.1

Poland

3.3

3.9

2.5

3.1

3.3

3.4

0.3

-1.2

-0.4

-0.2

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP
components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Includes Bulgaria, Croatia, Hungary, Poland, and Romania.
e. Includes Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia.
f. Includes Belarus, Moldova, and Ukraine.
g. Includes Armenia, Azerbaijan, and Georgia.
h. Includes Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

107

EUROPE AND CENTRAL ASIA

TABLE 2.2.2 Europe and Central Asia country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections

Albania

1.8

2.6

3.2

3.5

3.5

3.7

0.2

0.0

0.0

-0.3

Armenia

3.6

3.0

2.4

2.7

3.0

3.2

0.0

0.5

-0.1

0.1

Azerbaijan

2.0

1.1

-3.0

1.2

2.3

2.3

0.0

-1.1

0.5

1.0

Belarus

1.7

-3.9

-2.5

-0.5

1.3

1.4

0.0

0.5

0.5

1.0

Bosnia and Herzegovina

1.1

3.0

2.8

3.2

3.7

3.9

-0.2

0.2

0.1

0.2

Bulgaria

1.3

3.6

3.5

3.2

3.1

3.1

0.6

1.3

0.5

0.1

Croatia

-0.4

1.6

2.7

2.5

2.5

2.6

0.0

0.8

0.5

0.1

Georgia

4.6

2.8

3.4

5.2

5.3

5.0

0.0

0.4

0.7

0.3

Hungary

4.0

3.1

2.1

2.6

2.8

2.7

0.2

-0.5

0.2

0.5

Kazakhstan

4.2

1.2

0.9

2.2

3.7

4.0

0.0

0.8

0.3

0.0

Kosovo

1.2

4.1

3.6

3.9

3.7

3.6

0.5

0.0

-0.1

-0.4

Kyrgyz Republic

4.0

3.5

2.2

3.0

3.7

4.9

0.0

-1.2

-0.1

-0.4

Macedonia, FYR

3.6

3.8

2.0

3.3

3.7

4.0

0.1

-1.7

-0.7

-0.3

Moldova

4.8

-0.5

2.2

2.8

3.3

3.7

0.0

1.7

-1.2

-1.2

Montenegro

1.8

3.4

3.2

3.6

3.0

3.0

0.0

-0.5

0.5

0.0

Poland

3.3

3.9

2.5

3.1

3.3

3.4

0.3

-1.2

-0.4

-0.2

Romania

3.1

3.7

4.7

3.7

3.4

3.2

0.0

0.7

0.0

0.0

Russia

0.7

-3.7

-0.6

1.5

1.7

1.8

0.0

0.6

0.1

-0.1

Serbia

-1.8

0.8

2.5

2.8

3.5

3.5

0.0

0.7

0.5

0.0

Tajikistan

6.7

6.0

6.0

4.5

5.2

4.5

1.8

2.0

-0.3

-0.1

Turkey

5.2

6.1

2.5

3.0

3.5

3.7

2.1

-1.0

-0.5

-0.1

Turkmenistan

10.3

6.5

6.2

6.5

6.8

7.0

0.0

1.2

1.5

1.8

Ukraine

-6.6

-9.9

1.0

2.0

3.0

3.0

0.0

0.0

0.0

0.0

Uzbekistan

8.1

8.0

7.3

7.4

7.4

7.4

0.0

0.0

0.2

0.2

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
For additional information, please see www.worldbank.org/gep.

108

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia
Investment growth in the region declined from 10.2 percent in 2011 to 0.4 percent in 2015. The slowdown was initiallyconcentrated in Central Europe and reflected mainly the spillovers from the Euro Area’s debt crisis of 2011-12. A recovery ofinvestment growth in Central and South-Eastern Europe started in 2014, but this was more than offset by investment
contractions in Russia and other oil-exporting economies. Policy uncertainties and weak banking systems will likely limit regional
investment growth in the near-term. The investment slowdown has come at a time when investment needs are sizable. In many
commodity-importing economies, years of underinvestment have left substantial infrastructure deficits. Investment is key toboosting productivity and creating hospitable conditions for new growth sectors. However, efforts to address under-investment arelikely to be constrained by the need for sustainable financing.
Europe and Central Asia (ECA) accounted for 5 percent of
global investment during 2010-15. Investment growth in
the region decreased sharply, from a 10.2 percent in 2010
to 0.4 percent in 2015. Partial data for 2016 suggest thatinvestment is bottoming out in 2016, led by easing
investment contractions in Russia and Ukraine. However,regional investment growth remains well below its longterm (1995-2008) average of 6.5 percent a year.
This box discusses the following questions.
•

How has investment growth in the region evolved?

•

What are the region’s current and prospective
investment needs?

•

Which policies can help meet these needs?

The slowdown in investment growth in the ECA region
was initially concentrated in the Central Europe in theaftermath of the Euro Area’s debt crisis of 2011-12 andassociated recession. The post-crisis recovery in Central
Europe was weak, reflecting impaired banking systems andcorporate sectors in the aftermath of the Euro Area crisis.
Lingering concerns about armed conflict and related
geopolitical tensions (Russia, Ukraine), policy uncertainty
in several major regional economies, and adjustment to theterms-of-trade shock in energy exporters (Russia,
Azerbaijan, Kazakhstan) have weighed on regional
investment growth.
Meanwhile, current and prospective investment needs are
sizable. Investment and major reforms are needed toincrease productivity and set the stage for a sustained
growth recovery. However, efforts to address underinvestment are likely to be constrained by the need forsustainable financing.

Note: This section was prepared by Yoki Okawa and Ekaterine
Vashakmadze. Research assistance was provided by Shituo Sun, Trang
Thi Thuy Nguyen, and Liwei Liu.

How has investment growth in the region
evolved?
The recent investment growth slowdown was sharp andbroad based. In 2015, investment growth remained below
its long-term averages in three-quarters of the countries in
the region, and was negative in one-quarter of them,including Belarus, Russia, and Ukraine (Figure 2.2.1.1).
Between 2010 and 2015, investment growth trends
differed markedly between commodity importers, which
are located in Central, Eastern, and Southeastern Europe,and commodity exporters, mainly Russia and theeconomies of Central Asia.
The overall slowdown was partly a correction from
historically high investment growth prior to the global
financial crisis. Pre-crisis, large capital inflows and credit
booms fueled investment growth in the western part of theregion as financial systems became more integrated withthose in the Euro Area. Proximity to, and rapid
convergence with, the Euro Area appeared to promisebright growth prospects as regional labor and productmarkets became increasingly intertwined (World Bank
2010). In the eastern part of the region, pre-crisis
investment growth was buoyed by resource developmentencouraged by high global commodity prices.
In general, in commodity-importing EMDEs, investment
financing became difficult to obtain from domesticbanking sectors that were still healing from the crisis andpre-crisis credit booms (Hungary, Moldova, Serbia). The
2012-13 debt crisis and subsequent weak growth prospects
in the Euro Area weighed on investor sentiment (Chapter
3). Weak trade growth and lower capital inflows reduced
prospects for strong investment returns and increased
financing costs. Net capital inflows exceeded 10 percent of
GDP before the crisis but have been negative since 2013 in
the Central and Southeastern Europe. Large foreign
currency-denominated debt amplified the damage to thebanking sector (EBRD 2015a). In some countries, this wascompounded by policy uncertainty and lack of public

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EUROPE AND CENTRAL ASIA

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)
FIGURE 2.2.1.1 Investment growth slowdown in Europe and Central Asia, 2010-15
Regional investment growth declined from 10.2 percent in 2011 to 0.4 percent in 2015. Initially, the decline was concentrated
in the western part of the region and reflected spillovers from the Euro Area crisis. The recovery of investment growth in thewestern parts of the region in 2014-15 was outweighed by a contraction in oil-exporting economies in the eastern parts of theregion, which suffered a major terms-of-trade shock as a result of the oil price drop. Recession in Russia was exacerbated byinternational sanctions.
A. Investment growth by region

B. Five-year-ahead investment growth
expectations

C. Share of ECA economies with weak
investment growth

Percent
20

Percent
9
8
7
6
5
4
3
2
1
0
2010

Percent
Below long-term average
75

1995-2008 avg

2003-08 avg

15
10
5
-5

2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015

0

Western
RegionEastern
RegionOverall

Europe and Central Asia

EMDE

Commodity exporters
Commodity importers

Contracting

50

25

0
2011

2012

2013

2014

2015

2010

2011

2012

2013

2014

D. Foreign direct investment inflows

E. Terms of trade change

F. ICRG index of political stability

Percent of GDP
19
2015

Percent
30

Commodity exporters

14

20

Commodity importers

9

10

Index
68
66
64
62
60
58
56
54
52
50

Difference from 1990-2014 average

0

4

-10
-1

-20
MNE
TKM
GEO
ALB
AZE
SRB
KSV
BGR
MDA
UKR
TJK
BLR
TUR
KAZ
ROM
MKD
ARM
UZB
BIH
RUS

-6

-30
2010 2011 2012 2013 2014 2015

2015

Commodity exporters
Commodity importers
2010 2011 2012 2013 2014 2015

Sources: Consensus Forecasts, EBRD (2015a), Eurostat, Haver Analytics, World Bank.
A.C. Investment growth rates are weighted averages of gross fixed capital formation growth rates in the public and private sectors, respectively, in constant 2005 U.S.
dollars.
A. The eastern part of the region comprises Eastern Europe (Belarus, Moldova, and Ukraine), South Caucasus (Armenia, Azerbaijan and Georgia), Central Asia
(Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan) and Russia. The western part of the region includes Central Europe (Bulgaria, Croatia, Hungary,
Poland and Romania) and the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia), and Turkey.
B. Five-year ahead Consensus Forecasts as of the latest available month in the year denoted.
C. Share of ECA economies with investment growth below its long-term average or negative.
D. MNE = Montenegro, TKM = Turkmenistan, GEO = Georgia, ALB = Albania, AZE = Azerbaijan, SRB = Serbia, KSV = Kosovo, BGR = Bulgaria, MDA = Moldova, Republicof, UKR = Ukraine, TJK = Tajikistan, BLR = Belarus, TUR = Turkey, KAZ = Kazakhstan, ROM = Romania, MKD = FYR Macedonia, ARM = Armenia, UZB = Uzbekistan, BIH= Bosnia and Herzegovina, RUS = Russia.
E. Investment-weighted average. A decline denotes a terms of trade deterioration.
F. ICRG is the International Country Risk Guide, an investment-weighted average of political stability produced by the PRS Group. A higher index denotes greater politicalstability.

investment (Figure 2.2.1.2). Recovery has been gradualsince 2013, despite support from accommodative
monetary and fiscal policies in some countries, and sharply
lower oil prices that lifted business confidence and real
incomes.
In commodity-exporting EMDEs, the global financial crisisrelated fiscal stimulus supported double-digit investment
growth in 2010. Investment growth remained robust until
2013, but slowed sharply once oil prices started sliding in

2014. Since mid-2014, investment has contracted year-onyear in every quarter, weighed down by the following
factors: the unfolding conflict in Ukraine, intermittent
border tensions in the Caucasus, international sanctions
that heavily restricted access to finance in Russia, a severe
terms-of-trade shock that hit energy exporters (Azerbaijan,
Kazakhstan, Russia), and contracting public sector
investment. Neighboring countries suffered from spillover
effects, including weaker trade, remittances, and foreign
direct investment (World Bank 2016h).

109

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)
FIGURE 2.2.1.2 Investment decomposition,
2010-15After the global financial crisis, public investment growthslowed or turned negative across the region. In Central
Europe, the slowdown in investment was driven mainly
by weak manufacturing sector investment.

(EBRD 2015a; Figure 2.2.1.3).1 Investment priorities vary
widely across the region.
•

Russia has implemented important upgrades in certain
types of infrastructure, especially railways, mobilecellular telephone networks, and airlines. However,
the overall quality of infrastructure lags many EMDEs
at similar levels of development. Roads, port and airtransport infrastructure, and electricity supply all needconsiderable upgrading. The energy extraction sector
requires an estimated $1.9-$3.3 trillion in investment
between 2014 and 2035, while the power generation
sector requires $600 billion (International Energy
Agency 2014; Russian Investment Agency 2015).

•

Infrastructure in Turkey exceeds average EMDE
quality, but it has come under pressure as strife inneighboring countries has brought waves ofimmigrants: Turkey currently accommodates about 56
percent of all registered Syrian refugees. Annual energy
investments of $12 billion are required to meet thecountry’s development goals, to diversify the sector,
and to help narrow Turkey’s current account deficit
by reducing energy imports (Winrow 2015; Republic
of Turkey, Ministry of Energy and Natural Resources
2014). Turkey plans to increase renewable sources ofenergy, including nuclear, and improve energy
efficiency (EBRD 2015b). From 2014 to 2018, total
infrastructure investment needs are estimated at $350
billion (EBRD 2015b).

•

For landlocked Central Asia, developing andupgrading infrastructure are critical for connectivity
and reducing dependence on extractive industries.
Investment in the energy sector will help to improve
electricity access, a major concern for business (ADB
2016). Waste water systems in rural areas are also
underfunded.

•

In other countries in the ECA region, port, road, andrailway infrastructure needs improvement, andlogistics infrastructure needs to be upgraded to foster
trade and investment (Bosnia and Herzegovina,
Bulgaria). Border bottlenecks should be addressed andcustoms infrastructure improved. Upgrading watersupply and irrigation systems will enhance
productivity in agriculture and reduce environmental
degradation (Azerbaijan, Bosnia and Herzegovina,
Serbia, Uzbekistan).

A. Contributions to investment growth
Percentage points
12

PublicPrivate

10
8
6
4
2
0
-2
-4
-6

Commodity exporters Commodity importers
excl. Russia

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

2010

-8

RussiaB. Contribution to investment in Central Europe
Billion EUR

OthersConstruction

200

Real estate
Manufacturing

ICT
Agriculture

150

100

50

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0

2001

110

Sources: Haver Analytics, International Monetary Fund, World Bank.
A. Investment growth rates are growth rates of subgroup aggregated grossfixed capital formation in constant 2010 U.S. dollars.
B. EU4 (Bulgaria, Hungary, Poland, Romania). Sectorial allocation of
investment is not available for other countries.

What are current and prospective investment
needs?
Infrastructure needs are sizable across the ECA region. The
additional investment needed to reach the investment
levels of economies at similar stages of development has
been estimated at 1.3 percent of GDP per year, on average

1In addition to 24 countries in ECA region, the estimate includes the
Arab Republic of Egypt, Estonia, Jordan, Latvia, Lithuania, Mongolia,
Morocco, the Slovak Republic, Slovenia, and Tunisia.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EUROPE AND CENTRAL ASIA

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)

A. Investment gaps
Percent of GDP
Range

10

5

Central Asia

RussiaTurkey0

Eastern Europe
and the Caucasus

Turkey has initiated several public-private partnership(PPP) projects, including the Caspian and Middle
Eastern oil and gas pipeline and the $10.2 billion
Istanbul Grand Airport. Countries in Central Asia—
aspiring to become an overland transit and energy hub
linking Chinese and European markets—has initiatedinvestment projects in energy and transport sectors. In
the energy sector, major projects include a pipelinefrom Turkmenistan to India, gas sector developmentin Uzbekistan, and hydroelectric power in Tajikistan.
In the transport sector, key projects include highways
in Kazakhstan, railroads linking Tajikistan and Kyrgyz
Republic to China and the Islamic Republic of Iran,ports in Turkmenistan and Kazakhstan, and an airport
in Kyrgyz Republic.

Amid sizable investment gaps across the region, largescale infrastructure investment projects are underway.

South-eastern
Europe•In Russia, for example, several hundred infrastructure
projects were announced in the past five years, withmore than half scheduled for completion by 2020.
These projects are mostly in more densely populated
western Russia. The largest allocations are fortransport infrastructure (especially high-speed rail, androad and bridge construction). But there are also alarge number of projects to improve the supply of
utilities (electric power, gas, and water).

Central Europe
and the Baltic•

FIGURE 2.2.1.3 Investment gaps andprojects

EBRD
countries

Initiatives are already underway to improve infrastructurein the region:

B. Projects in Central Asia
USD,billions
2

Transport

Energy1•

In Central and South Eastern Europe, the investment
pipeline largely reflects EU funding to further
integrate the EU member states of the region with
Western European countries.

Climate adaptation and energy efficiency. ECA is an energyintensive region that relies heavily on non-renewableenergy (Figure 2.2.1.4). Belarus, Bosnia and Herzegovina,
and Turkey are implementing policy reforms (such as costbased energy pricing) and investments in both public
infrastructure and private industry, including renewableenergy and energy efficiency, in partnership with theWorld Bank. Efforts to adapt to climate change include
improved water resource management (flood protection,water loss reduction, irrigation efficiency) in Kazakhstan;
climate-smart agriculture (switching to more resilient
crops) in Tajikistan; and better weather forecasting andclimate change monitoring in Russia.
Education and health. The region has made significant
advances in the area of human development, including
reductions in child mortality rates. Many countries in theregion have achieved universal primary enrollment andgender parity in both primary and secondary education,

0
2013

2014

2015

Sources: Central Asia Regional Economic Cooperation (CAREC),
European Investment Bank.
A. Range of different investment gap estimates for each region from EBRD
(2015a). EBRD countries includes Estonia, Latvia, Lithuania, the Slovak
Republic, Slovenia Mongolia, Egypt, Jordan, Morocco, Tunisia in addition to
24 countries in ECA region. Financing gap for Central Asia and theCaucasus includes all infrastructure financing requirements that are notcovered by national governments. For Central Asia, the range is GDP
weighted average for Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia,
Tajikistan, and Uzbekistan.
B. Total value of approved CAREC related projects in Azerbaijan,
Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, Tajikistan andUzbekistan.

and literacy rates are high. On average, the ECA region
scores above average among EMDE regions in several
educationandhealthindicators.
Nevertheless,shortcomings remain. Levels of learning achievement are
low in several countries, and socio-economic and ethnic
disparities in education persist. Among the basic education
indicators, regional gaps are most apparent for math and111

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)
FIGURE 2.2.1.4 Infrastructure indicator
The quality of infrastructure in the most of the region is substantially below OECD average. Investment gaps remain large intransportation and energy. Port container traffic is limited, highlighting the region’s reliance on road, air, and rail transport. The
quality of air and road transport infrastructure remains well below OECD averages in most of the region. The region is energy
intensive and heavily reliant on non-renewable energy.

Score
6

15

4

10

3

4
3

D. Quality of roads
Score
6

Range

MedianOECD median

5

Europe &Central Asia

Sub-SaharanAfricaSouth Asia

Latin America& CaribbeanWestern
Balkans

South
Caucasus

CentralAsia

CentralEuropeEasternEurope0

Middle East &N. Africa

East Asia &Pacific

0

1

F. Share of renewable energy

Energy use per GDP
200

Percent

150

70
60
50
40
30
20
10
0

50

Latin America& Caribbean

South Asia

Middle East &N. Africa

OECD

Europe &Central Asia

Western
Balkans

South
Caucasus

CentralAsia

CentralEurope2

East Asia &Pacific

0Sub-SaharanAfrica3

2

E. Energy use intensity

100
4OECD median

5

5

2

MedianWestern
Balkans

5

Range

South
Caucasus

Container traffic per GDP
20

CentralAsia

MedianC. Quality of air transport

CentralEurope

Range

Score
6

B. Port container traffic

EasternEuropeA. Overall infrastructure quality

EasternEurope112

Range
MedianEMDE median (energy exporter)
EMDE median (energy importer)

ECA
energy exporter

ECA
energy importer

Sources: EBRD (2015a), Haver Analytics, World Bank, World Economic Forum.
A. The score is overall quality of infrastructure. The score from 1 to 7 (best). Investment is the share of fixed capital formation as a percent of GDP. OECD average is theaverage investment share of OECD countries from 1990 to latest.
B. Regional sum of container port traffic (TEU: 20 foot equivalent) per current USD GDP in millions in 2014.
C.D. The score is from 1 to 7 (best). The OECD and EMDE average are the simple average of all the countries in the respective subgroupings.
E. Regional aggregated number. Data are in 2014 or latest available data. GDP data are in constant 2011 “international dollars.”
F. Share of renewable energy consumption as percent of total final energy consumption in 2012. EMDE averages are the simple average of all the countries in the respective subgroupings.

science education. The region scores well below the EMDE
average on attracting and retaining talent (Figure 2.2.1.5).
Building a highly skilled workforce will require improving
the quality of education, investing in on-the-job training,
and using talent more effectively.

Which policies can help address investment
needs?

structural policies are needed in all cases to raise
investment growth (Chapter 3). Fiscal policy could help
most directly by expanding public investment whilemonetary policy could boost activity by lowering financing
costs. Structural reforms could address factors holding backprivate investment, including by boosting productivity andaggregate growth prospects and improving the businessclimate.

Unmet investment needs limit growth in the region, alongwith governance, financial, and labor market obstacles(World Bank 2015e-h; World Bank and Vietnam 2016;
World Bank 2016h; EBDR 2015a). While policy priorities
depend on country circumstances, appropriate cyclical andMany EMDEs in the ECA region remain under pressure
to consolidate their fiscal positions to reduce high debt-toGDP ratios and ensure long-term fiscal sustainability(Georgia, Hungary, Chapter 2). This constrains theirability to finance public investment and places a premium

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

EUROPE AND CENTRAL ASIA

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)
FIGURE 2.2.1.5 Human development indicators
Health and educational expenditure is highest among EMDE region and close to the OECD average. The region madesignificant advances in the area of human development. Nevertheless, important shortcomings remain. Among the basic
education indicators, the region scores below the OECD average in math and science outcomes. The region also lags behindboth the OECD and the EMDE average in attracting and retaining talent.
A. Selected health care indicators

B. Selected education indicators

Per capita

120

Percent of per capita
income, ratio
45

100

40

Percent of population

5000

4000

Range

35
80
3000
60
2000
40

AE

EMDEs

ECA

30
25
20
15

1000

Range

AE

EMDE

20

ECA

0

0
Health expenditure Improved sanitation
(LHS)
(RHS)

Improved water
source (RHS)

10
50
Government expenditure

D. Attracting and retaining talent

C. Math and science outcomes
Score

Pupil-teacher ratio

6

Score
5

5

4

2016-2017

OECD average

42016-2017

OECD average

3

3
2

SerbiaMoldova

Croatia

Bosnia & Herz.

Hungary

Macedonia, FYR

Kyrgyz Republic

PolandAlbania

Montenegro

TurkeyBulgaria

Georgia

Armenia

RussiaUkraineTajikistanAzerbaijan

TurkeyKyrgyz Republic

Georgia

Hungary

Bosnia & Herz.

Azerbaijan

Bulgaria

Tajikistan

Moldova

Kazakhstan

Macedonia, FYR

PolandMontenegro

SerbiaRussiaCroatia0

Armenia0

Albania1

Ukraine1

Kazakhstan

2

Sources: Haver Analytics, World Bank, World Economic Forum.
A. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita in purchasing power parity terms, unweighted averagesof 199 EMDEs, 34 AEs, and 19 ECA economies. Access to improved sanitation facilities (in percent of population), unweighted averages for 150 EMDEs, 33 AEs, and 22
ECA economies. Access to improved water sources (in percent of population), unweighted averages for 148 EMDEs, 34 AEs, and 22 ECA economies. Latest available
data available during 2011-15.
B. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary student (in percent of per capita income), unweighted averages of 87 EMDEs, 32 AEs, and 10 ECA economies. Pupil-teacher ratio in primary education (headcount basis), unweighted averages for 165 EMDEs, 31
AEs, and 20 ECA economies. Latest available data available during 2011-15.
C.D. The score is from 1 to 7 (best). The OECD and EMDE average are the simple averages of all the countries in the respective subgroupings.

on reforms that encourage private investment. Only a few
regional economies can tap debt markets to financeinfrastructure, while weak domestic banking systems andunderdeveloped capital markets restrict the ability of
governments to borrow domestically.
With weak growth, limited fiscal resources, and net capitaloutflows, the gap between infrastructure needs and theability of governments to meet those needs may widen.
This places a premium on measures to improve investment
efficiency and to obtain funding from multilateral sourcesor the private sector.
Investment efficiency. Effective public investments canmeet needs with less cost (Dabla-Norris et. al. 2012), but
regional institutional capacities fall behind the standards in113

CHAPTER 2.2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.2.1 Recent investment slowdown: Europe and Central Asia (continued)
FIGURE 2.2.1.6 Institutional quality
Various measures of institutional efficiency in the ECA
region are below the advanced-economy average. The
western part of the region performs better than theeastern part on every measure. Governance and stability
indicators in the eastern part of the region are often
worse than the EMDE average.
A. Government and policy efficiency
Index
5

Range

Average

4
3
2
1

Government Effectiveness

EMDE

ECA East

ECA West

Advanced

EMDE

ECA East

ECA West

Advanced

0Regulatory Quality

B. Governance and stability
Range

Index
5

Average4
3
2
1

Control of Corruption

EMDE

ECA East

ECA West

Advanced

EMDE

ECA East

ECA West

0

Advanced

114

Political Stability and Safety

Source: World Bank.
A.B. The blue bars mark the range. EMDE is Emerging Market andDeveloping Economies. ECA stands for the Europe and Central Asia. The
eastern part of the region comprises Eastern Europe (Belarus, Moldova, andUkraine), South Caucasus (Armenia, Azerbaijan and Georgia), Central Asia
(Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan)and Russia. The western part of the region includes Central Europe(Bulgaria, Croatia, Hungary, Poland and Romania) and the Western Balkans(Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro,
and Serbia), and Turkey. Scores range from 0 (not efficient) to 5 (efficient).
Data from 2015 or latest available data.

advanced economies in this area (Figure 2.2.1.6). The
eastern part of the ECA region ranks particularly low in
relevant measures, including social stability, government
effectiveness, and corruption. The efficiency of investments
can be enhanced through a strategic, rigorous andtransparent project selection mechanism and throughstrong institutions able to fund, manage, execute andmonitor project implementation (Chapter 3).
Private funding. Policy efforts can be geared toward
developing private funding sources for investment. Many
countries still lack adequate frameworks for effective public-private partnerships (PPP), which can improve theeffectiveness of public investment (Engel, Fischer, andGaletovic 2014). Capital market reforms can help channel
domestic savings towards private investment (EBRD
2015a).
Multilateral funding sources. The region, especially theSouth Caucasus and Central Asia, will continue to dependon financial support from multilateral development
institutions like the European Bank for Reconstruction andDevelopment (EBRD), the Asian Development Bank
(ADB), and the World Bank. Countries in Central Asia
will likely be the largest beneficiaries of China’s “One Belt,
One Road” (OBOR) initiative, due to their locations andnatural resource abundance. EU structural funds willcontinue to play an important role in closing investment
gaps in Central and South Eastern Europe.

Output in Latin America and the Caribbean is estimated to have contracted 1.4 percent in 2016, the second
consecutive year of negative growth. This weakness was due to the combined effects of low commodity prices anddomestic economic challenges in large economies. In South America, where a large share of countries arecommodity exporters, GDP growth contracted 2.8 percent. Growth in Mexico and Central America slowed to
2.3 percent, while growth in the Caribbean decelerated to 3.2 percent. Regional growth is projected to recover,reaching 2.6 percent in 2019, as domestic constraints loosen and fiscal consolidation is completed. Downside
risks to the outlook include rising policy uncertainty among advanced economies, a renewed slide in commodity
prices, and weaker-than-expected activity among the region’s largest economies. A key policy challenge is tonurture the nascent and fragile recovery, particularly in South America, while completing the fiscal adjustment
to lower commodity revenues.

Recent developments
Overview
Weighed down by depressed commodity prices,slowing global growth, and domestic challenges
among its largest economies, economic activity inthe Latin American and the Caribbean (LAC)
region contracted for the second consecutive year
in 2016—the first time this has happened since
the debt crisis of the early 1980s (Figure 2.3.1).
The contraction in regional output, estimated at
1.4 percent in 2016, was more than double that ofthe previous year. For the third successive year theregion registered the lowest growth rate among thesix EMDE regions.
South America, with a large share of majorcommodity exporters, saw GDP contract 2.8
percent in 2016, larger than the 1.9 percent
contraction in 2015. In Mexico and Central
America, growth slowed from 2.8 percent in2015 to 2.3 percent, in line with the slowdown in
the U.S. economy. The Caribbean economy
Note: This section was prepared by Derek H. C. Chen and Dana
Vorisek, with contributions from Lei Ye, Jongrim Ha, Hideaki
Matsuoka, and Eung Ju Kim. Research assistance was provided by
Liwei Liu.

decelerated to 3.2 percent in 2016 after growing
3.4 percent in 2015.
Domestic economic challenges among the region’slargest economies were major factors behind theweakness in activity. Argentina and Brazil implemented tighter policies and reforms to reduce
macroeconomic distortions. República Bolivariana
de Venezuela
suffered double-digit negative
growth in 2016 due to a combination of persistentdistortionary policies and low oil prices, whichhave led to severe economic imbalances.
The region also faces challenges stemming frominternational economic conditions. Despite somerecent gains, commodity prices remain low relative
to the immediate post-crisis years, contributing to
the broad-based slowdown in economic activity
across the region. Several countries experienced
equity market turbulence and currency
depreciation following the U.S. elections.
Financial sector
Through most of 2016, accommodative monetary
policy in advanced economies encouraged investors to seek out higher yields in EMDE assets.
Investors’ sentiment toward the LAC region also
improved thanks to the modest recovery in oil

116

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.3.1 Growth
Regional growth contracted for the second consecutive year in 2016—thefirst multi-year recession in more than 30 years. The weakness isunderpinned by the severe contraction in South America, which has alarge share of major commodity exporters. The other two sub-regions—
Mexico and Central America and the Caribbean, which have closer links
with the United States—posted positive growth.
A. LAC regional growth
Percent
Multi-year recession
8

B. Regional and sub-regional growth

ActualEstimated

7

6

Percent
5

2014

2015

2016e

3

4
1

2

-1

0
-2

-3
LAC

2016

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

0

1980

-4

South
Mexico Caribbean
America and Central
America

2016Q3

2015Q1

2013Q3

2012Q1

2010Q3

2016Q3

2015Q1

2013Q3

2012Q1

2010Q3

2009Q1

2007Q3

2006Q1

2004Q3

2003Q1

2001Q3

2000Q10

2009Q1

40

2007Q380

2006Q1

120

2004Q3

Percent, year-on-year
Mexico and Central America
8
United States
6
4
2
0
-2
-4
-6

2003Q1

Percent, year-on-year
South America GDP growthCommodity price index (2010=100, RHS) 160

10
8
6
4
2
0
-2
-4

2001Q3

D. Growth in Mexico, Central America,
and the United States

2000Q1

C. Commodity prices and growth inSouth America

Sources: Haver Analytics, World Bank.
Notes: Regional and sub-regional aggregates are presented as GDP-weighted averages.
e=estimated.
B. Regional and subregional country coverage is as in Table 2.3.1.
C. South America includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Paraguay,
Uruguay, and República Bolivariana de Venezuela. Commodity price index is calculated as aweighted average of the World Bank’s energy (60 percent) and non-energy (40 percent) commodity
indexes.
D. Mexico and Central America include Costa Rica, El Salvador, Guatemala, Honduras, Mexico,
Nicaragua, and Panama.

prices and stabilization of other commodity prices.
Business-friendly and market-oriented governments in Argentina and Brazil, and Argentina’s
settlement with “holdout” creditors, also benefited
sentiment. Also, LAC assets were trading at large
discounts, making them attractive to investors.
After two consecutive years of outflows, capital
inflows to the region resumed in 2016, with rallies
across various asset classes for most of the year,
including bonds and equities.
After rising from a monthly average of $10.8
billion between January and October 2016, up
from a monthly average of $5.5 billion in 2015,
regional bond issuance plunged to $1.1 billion in
November. The increase prior to November was

led by Argentina, which returned to the market
with a $16.5 billion sovereign issue in April—the
second-largest international bond sale ever by an
EMDE. With prospects of policy change, Brazil
issued $17.5 billion in the first nine months of
2016, despite the loss of its investment-gradecredit rating. Some small countries (theDominican Republic, Ecuador, Guatemala,Trinidad and Tobago, Uruguay) also took
advantage of investor appetite and issued bonds.
Jamaica went to the market in August to exchange$785 million high-coupon bonds coming due in
2017–19 for lower-cost bonds maturing in 2039.
LAC bond spreads have declined by more thanthose of other regions, signaling improving
investor confidence (Figure 2.3.2).
Similarly, equities across the region rallied in2016. Stock indexes gained in Argentina, Brazil,
Chile, Colombia, Mexico, and Peru, with Peru’s
S&P Lima General Index rising more than 50
percent on improving investor confidence.
Meanwhile, several currencies strengthened, led by
the Brazilian real and the Colombian peso. Boththe Argentine and Mexican peso depreciated,
however, especially following the U.S. elections.1
The South American banking system is vulnerable
to rising financing costs due to the downturn inthe mining sector and soft general economic
activity. In particular, the share of non-performing
loans has increased (Figure 2.3.3).
Inflation and monetary policy
Regional consumer price inflation continued toedge up in 2016, with divergent paths among the
sub-regions (Figure 2.3.4). In South America,
rates remain elevated relative to inflation target
bands, reflecting depreciated currencies and highfood costs due to adverse weather conditions.
Accordingly, South American central banks kept atight monetary policy stance for most of 2016. In
contrast, inflation continued to be benign among
Central American and Caribbean economies, thevast majority of which are oil importers and havebenefited from low oil prices.
1Coppola, Lagersborg, and Mustafaoglu (2016) find that theArgentine peso was overvalued by 39 percent before the 2015
exchange rate reunification.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Low commodity prices and weak economic
activity have reduced fiscal revenues and increased
pressure on fiscal balances and public debt levels
across the region (Figure 2.3.5). Oil exporters—
suchas
Colombia,
Ecuador,Trinidadand Tobago, and República Bolivariana deVenezuela—have been particularly hard hit.
Similarly, Central America has been affected by
low agricultural and metal prices. Most countries
have been undergoing fiscal consolidation—except
for Chile and Peru, which have been
implementing expansionary fiscal policies tosupport growth.

Nov-16

Jul-16

Sep-16

2016Q4

2016Q3

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

0

Chile
Peru

May-16

10

Jan-1620

Mar-1630

BrazilMexicoNov-1540

May-15

BrazilOthersJul-15Percent, year-on-year
Argentina
Colombia
80
60
40
20
0
-20
-40

Argentina
MexicoSep-15

U.S. dollar billions
50

Jan-15B. Major stock market indexes

Mar-15

A. International bond issuance

C. Sovereign bond spreads

D. Sovereign bond spreads

Basis points
Brazil700
Colombia
Mexico600

Basis points
Belize Ecuador Venezuela, RB
5000

Dominican Republic
Peru
Chile

500
400
300
200
100
0

4000
3000
2000
1000

E. Spot exchange rates against U.S.
dollar

F. Real effective exchange rates

Percent
25

Percent change during period
2014 2015 YTD 2016
25

2014

2015

2016

15

Dec-16Oct-16Jun-16Aug-16

Apr-16

Feb-16

Dec-15Oct-15Jun-15Aug-15

Apr-15

Feb-15

Dec-16Oct-16Jun-16Aug-16

Apr-16

Feb-16

Dec-15Oct-15Jun-15Aug-15

Apr-150

15

5BrazilUruguay

Colombia

Chile

Paraguay

Peru

Argentina

Dominican
Republic

BrazilColombia

Chile

-25

Guatemala

-15

-35
Peru

-25
Dominican
Republic-5

Mexico-15

Mexico5-5

Costa Rica

Fiscal policy

Investor sentiment toward the region improved through much of 2016, inpart reflecting the installation of new and more business-friendly andmarket-oriented governments in Argentina and Brazil. Bond issuance tothe region resumed, easing regional financial conditions, before plunging
in November. Several countries experienced equity market turbulence andcurrency depreciation following the U.S. elections.

Feb-15

In Central America and in the Caribbean, where
inflation and growth have been low, central banks
have mostly implemented accommodative
monetary policies. Falling consumer prices
in Costa Rica, for example, encouraged its central
bank to keep its policy interest rate at a 10-year
low. In Jamaica, inflation reached record lowsof below 2 percent in the second half of 2016.
Mexico was an exception in the sub-region, with
its central bank tightening policy rates to stem
the depreciation of the peso, most recently in
mid-December. While inflation has been creeping
up, it has remained well within the 2–4 percent
target band.

FIGURE 2.3.2 Financial sector

Argentina

Inflation in Brazil moved down through 2016,
though exchange rate depreciation is keeping
the cost of imports high. The central bankmaintained the Selic policy rate at a 10-year highof 14.25 percent for 15 months, before making
two rate cuts, in October and November. Inflationin Colombia has been boosted by higher foodcosts, reflecting supply problems caused bydrought in 2015 and by a truckers’ strike in July
2016. The central bank has raised its policy
interest rate 11 times since September 2015. In
Argentina, the central bank announced theadoption of a formal inflation targeting regime, tobegin in 2017, in order to bring inflation to thesingle digits by 2019. And in República
Bolivariana de Venezuela, chronic monetization of
the public sector deficit has caused an accelerationof prices toward hyperinflation.

117

LATIN AMERICA AND THE CARIBBEAN

Sources: Dealogic, Haver Analytics, J.P. Morgan, World Bank.
A. Data includes sovereign and corporate bond issuance. “Others” are Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Guatemala, Jamaica, Panama, Paraguay, Peru, Trinidad and Tobago,and Uruguay. 2016Q4 includes October and November data.
C.D. Last observation is December 15, 2016.
E. 2016 covers January 1, 2016 to December 19, 2016.
F. Last observation is November 2016.

In several South American commodity-exporting
economies, deficits have ballooned since 2013.
Colombia’s deficit widened under the impact ofdepressed oil revenues, while higher interest
payments have pushed up expenditures. With the
sharp contraction in economic activity, Brazil’s
overall deficit had been widening until recently.

118

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.3.3 Banking systems
Banking systems in South America have reported a rise in non-performing
loans, while capital ratios in Mexico and Central America have declined.
A. Ratio of non-performing loans tototal gross loans

B. Capital adequacy: ratio of
regulatory tier 1 capital to riskweighted assets

Percent

Percent
16
South America

South America
Mexico and Central America
Long-term average: South America
Long-term average: Mexico and Central America

4.0
3.5

Mexico and Central America
Long-term average: South America
Long-term average: Mexico and Central America

15
14

3.0

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q1

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q2

11

2014Q112

2.0

2014Q213

2.5

Sources: Haver Analytics, World Bank.
Note: Subregional aggregates are presented as GDP-weighted averages. South America includes
Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay and Peru. Mexico and Central America
includes Costa Rica, El Salvador Guatemala, Honduras, Mexico, and Panama. Long-term average
2008Q1-2015Q4.

Budget deficits in Mexico and Central America
have been shrinking. In Mexico, this reflects
numerous expenditure cuts and the 2014 tax
reform, which introduced new revenue sources.
Several Caribbean economies are expected tosee fiscal improvement in the medium term, on
the basis of consolidation efforts. However, theoverall sub-regional balance was weighed down by
the sub-region’s two largest economies, theDominican Republic and Trinidad and Tobago.
Compared to an exceptional surplus in 2015,
the Dominican Republic’s overall fiscal deficit
widened in 2016 to around its post-financial crisis average. Despite numerous reforms over theyears, revenue-generating capacity in the
Dominican Republic remains weak, largely
because of persistently high levels of informality,
tax evasion, and existing tax exemptions. Trinidad
and Tobago’s fiscal deficit widened on weak
oil revenues.

FIGURE 2.3.4 Inflation and monetary policy
Inflation remains elevated in South America but moderate in Mexico andCentral America and in the Caribbean, providing scope for monetary policy
accommodation in these two sub-regions.
A. Consumer price inflation

B. Core inflation

Percent, year-on-year
Headline 201510
Headline YTD 2016
Upper & lower inflation targets
8

Percent, year-on-year
10Core 2015

6

6

Core YTD 2016

4
2

2

D. Mexico and Central America:
Policy interest rates

Percent
Chile
10
Peru

Percent
10

Colombia
Paraguay
Brazil (RHS)

16

8

12

Costa Rica

MexicoC. South America: Policy interest
rates

Dominican
Republic

Nicaragua

Guatemala

Peru

Chile

Paraguay

Brazil-2

Colombia

Costa Rica

MexicoDominican
Republic

Nicaragua

Jamaica

Guatemala

Peru

Chile

Paraguay

BrazilMexicoCosta Rica
Dominican Republic
GuatemalaHonduras8
62

Source: Haver Analytics, Central Bank News, World Bank.
Note: GDP-weighted averages. e = estimate.
A.B. 2015 data shows the simple average of monthly observations of year-on-year inflation fromJanuary to December 2015. YTD 2016 shows the simple average from January 2016 to November
2016.

Nov-16May-16

Feb-16

Nov-15Aug-15May-15

Feb-150

Nov-14

Nov-16Aug-16May-16

Feb-16

Nov-15Aug-15May-15

Feb-15

Nov-14Aug-14Feb-140

May-140

4Aug-14

4

2

Feb-148
4May-14

6

Aug-16-2

Colombia

0

External sector
A number of countries in the region (Mexico
excepted) saw more robust export growth in 2016
than in 2015. Together with muted importdemand due to the economic slowdown, theuptick in exports contributed a significant
narrowing of current account deficits in 2016
(Figure 2.3.6). In South America, Peru saw anexport surge of more than 8 percent in the firsthalf of 2016, mainly reflecting a large increase incopper production. In Brazil, the still weak real
lifted exports in the first half of 2016, sharply
reducing the country’s current account deficit.
In Mexico, moderating demand from the UnitedStates weighed on export growth. Other Central
American and Caribbean econo-mies saw
accelerating exports, despite slowing U.S. demand.
Costa Rica’s exports to the United States for
January to August 2016 rose by 5 percent year-onyear. The current account balance for the
Dominican Republic switched to a surplus in thefirst half of 2016 on strong receipts fromremittances and tourism, and low oil prices.2
2WorldBank (2016i) analyzes the variations in export
performance across countries by looking at differences in exchange
rates and external demand.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

119

LATIN AMERICA AND THE CARIBBEAN

Poverty

FIGURE 2.3.5 Fiscal policy

Poverty rates remain lower in South America thanin Mexico, Central America, and the Caribbean.
However, with unemployment rates stable orrising and real wages stagnating in 2016, poverty
may have increased in South America (Figure
2.3.7). This threatens to reverse some of thepoverty reduction achieved earlier in the decade.
In contrast, poverty rates are still on the decline in
the Mexico and Central America and the
Caribbean sub-regions. A reduction in
unemployment rates and higher real wages since2013 underpin this improvement.

Low commodity prices and slow economic growth have led to lower fiscal
revenues and greater pressures on fiscal balances and debt levels acrossthe region. Despite fiscal consolidation in a number of countries, deficits
have continued to rise in South America and the Caribbean, and debt isrising in several South American countries.
A. Overall fiscal balance

B. Government structural balance

Percent of GDP
0

Percent of potential GDP
2

Outlook
Regional output growth is projected to resume in2017, and to rise steadily to 2.6 percent in 2019
(Figure 2.3.8). The improving outlook is largely
driven by an envisaged return to positive growthin Brazil, the region’s largest economy.
The timing of the growth pickup in the region
is expected to be different across the sub-regions.
Growth in South America is assumed to bottom out in 2016 and then gain momentum from2017, reaching 2.4 percent in 2019. In Mexico
and Central America, growth is projected to
begin accelerating in 2018, reaching 2.9 percent
in 2019.
Global headwinds, such as policy uncertainty in
the United States and subdued growth among
other major trading partners, will weigh on

2016e

-2

-4

-4

-6

-6

3
2
1
0
-1
LAC

South
America

CentralAmericaand theCaribbean

MexicoMexico2015

H1 2016

Mexico4

El Salvador

H1 2016

Chile

Percent of GDP
70
2014
60
50
40
30
20
10
0

2015

Ecuador

Percent, year-on-year20145

Colombia

D. General government debt

BrazilC. Government consumption growth

Dominican
Republic
PanamaPeru

Uruguay

EcuadorParaguay

Chile

South
Mexico and Caribbean
America
CentralAmerica

Colombia

-10

-8
-10
Brazil2014
2016eArgentina

2013
2015

-8
LAC

While there have been significant gains in
reducing poverty over the past decades, income
inequality remains high relative to other emerging
and developing regions. Eight of the ten mostunequal countries in the world (as measured by
Gini indexes) are in Latin America and the
Caribbean (World Bank 2016j). While inequality
in Central America declined notably in the mostrecently available data, it increased in someSouthern Cone countries. Increasing growth inincome or consumption expenditure of thepoorest 40 percent of people in these highly
unequal countries is key to further reducing
poverty (World Bank 2016j).

2013

0

-2

Sources: International Monetary Fund, Haver Analytics, World Bank.
Notes: Regional and subregional aggregates are presented as GDP-weighted averages.
e = estimate.
A. Regional and subregional country coverage is as in Table 2.3.1.
B. Structural balances are cyclically adjusted.
C. South America includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, andUruguay. Central America and the Caribbean includes Costa Rica, Dominican Republic, Guatemala,Honduras, and Nicaragua.
D. Data reflects gross government debt.

economies across the region, at least in the nearterm. However, commodity prices are projected tostabilize and to gradually recover, providing
modest relief for regional commodity exporters
with improved terms of trade and increased fiscal
and export revenues.
Within the region, several countries are
implementing fiscal consolidation and reforms. As
these are completed, economies will be on a better
fiscal footing, with space for urgently needed
public investment projects to promote growth in
the medium term. Economic activity will besupported by exports, which are still benefitingfrom a competitive edge derived from priordepreciations. These competitiveness effects will

120

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017be partially offset by weak growth in advanced
economies.

FIGURE 2.3.6 External sector
Relative to their peaks in 2012-13, regional currencies are still weak in realterms, despite some recent appreciation. This has supported export
growth in many countries and contributed to a reduction in current accountdeficits. In Mexico and Central America, continued strong growth ofremittance inflows has also supported falling current account deficits.
Tourism growth in a number of Caribbean countries, which had been
robust, slowed or declined in 2016.
A. Export growth

B. Remittances

Percent, year-on-year

H1 2015

Percent
8

H1 20168

Percent of GDP

GrowthLevel (RHS)

10

5

4

6

2

2

0
-1

-2

-4

-6

C. Current account balance

2015

2014

2016e

2015

2014

2015

2014

2016e

2015

2016e

2016e

Trinidad andTobagoSt. Lucia

St. Kitts
and Nevis

2014
2015
YTD 2016

Jamaica

MexicoCosta Rica

Dominican
Republic

GuatemalaColombia

Peru

Argentina-6

Grenada-4

Barbados

0

BrazilMexico and Caribbean
CentralAmerica

Percent growth, year-over-year
15
12
9
6
3
0
-3
-6
DomincanRepublic

H1 2016

Bahamas, The

H1 2015-2

UruguaySouth
America

D. Tourist arrivals

2

-8

LAC

Antingua andBarbudaPercent of GDP
42014

MexicoBolivia

Costa Rica
Dominican
Republic

Chile

Uruguay

EcuadorColombia

Argentina

Peru

-8

Brazil-4

Sources: Haver Analytics, UN World Tourism Organization, World Bank.
A. Export data reflects good s and services.
B. South America includes Bolivia, Brazil, Colombia, Ecuador, Paraguay, and Peru. Mexico andCentral America includes Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua,
and Panama. Caribbean includes Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti,
Jamaica, St. Lucia, St. Vincent and the Grenadines, and Suriname.
D. 2016 data is quarterly. For Antigua and Barbuda, the Dominican Republic, and Trinidad andTobago, YTD 2016 reflects data through Q3. For all other countries, YTD 2016 reflects data
through Q2.

FIGURE 2.3.7 Unemployment and earnings
Unemployment was stable or rising and wage growth was lackluster inmost LAC countries 2016. Mexico was a notable exception, however.
These conditions may have contributed to an increase in poverty.

2013

BrazilBrazilColombia

Costa Rica

Argentina

Uruguay

Peru

Chile

-4

Dominican
Republic0
Mexico-2
Ecuador02

Colombia

2

4

Chile

6

Uruguay8

4

Ecuador

10

Costa
Rica

Percent change, year-over-year2016 Q1-Q3
6

2013

Mexico2016 Q1-Q3

While the outlook for Mexico and Central
America is relatively better than for SouthAmerica, growth expectations have deteriorated
since mid-2016. Investment in Mexico isenvisaged to weaken in 2017, in part due to policy
uncertainty in the United States and policy
uncertainty around domestic elections in 2018.
Mexico is expected to see robust private
consumption, however, buoyed by low inflation,
low unemployment, increasing real wages, andstrong remittance inflows. Reforms in somecountries in the Mexico and Central America subregion have enhanced tax collection and reduced
fiscal deficits (Mexico, Panama), making
expansionary fiscal policy an option, if needed.
Although global conditions are not conducive torobust growth in international trade, weakcurrencies may give a competitiveness boost to the
sub-region’s exports.

B. Earnings

A. Unemployment rates
Percent
12

South America saw a sharper recession in 2016
than in 2015, but the sub-region is expected torebound in 2017. Domestic constraints appear tobe easing in Argentina and Brazil, with the new
governments focused on implementing reforms toease macroeconomic and fiscal imbalances.
Colombia and Ecuador, which are struggling withlow fiscal revenues from depressed oil prices, will
see weak growth in 2017. República Bolivariana
de Venezuela continues to suffer from severe
economic imbalances, and economic contraction
is expected to persist. Due to elevated government
deficits, and the accelerating inflation rate, reforms
are needed to consolidate the budget and to end
the monetizing of the deficit.

Sources: Haver Analytics, World Bank.
A. Data for Q1-Q3 2016 is the average during that period; data for 2013 is the average for Q1-Q4
2013. For Argentina, 2016 data is available in only Q1 and Q2. For Ecuador, 2013 data is available
only for Q2 and Q4.
B. “Earnings” is earnings or wages, deflated by the CPI. Data for Q1-Q3 2016 is the average duringthat period. Data for 2013 is the average for Q1-Q4 2013.

In the Caribbean, growth is expected to risemodestly in the medium term after remaining
broadly stable in 2017. In the Dominican
Republic, the sub-region’s largest economy,
growth will ease in 2017 on the completionof large construction projects and lower
government outlays.

Risks
Risks to the regional growth outlook are tilted
to the downside. While each risk, if realized,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Renewed slide in commodity prices. Given theregion’s large exposure to commodity prices, andthe weakened state of fiscal balances in several
economies, renewed declines in commodity prices
would be severely detrimental to the regional
outlook, as well as the prospects of regionalcommodity exporters. (Fernandez, Gonzalez, andRodriguez 2015).
Protracted weakness in large economies in theregion. The outlook is predicated on a bottoming
out in Brazil and Argentina between the end of2016 and the first half of 2017. Should theweakness in Brazil, Argentina, or República
Bolivariana de Venezuela persist for longer than
expected, regional growth would be lower thanprojected.
Sharper-than-expected tightening by the U.S.
Federal Reserve. The U.S. Federal Reserve is
expected to further tighten monetary policy
gradually. However, a reassessment of the pace ofU.S. tightening by market participants could leadto swings in interest rates, volatility in capital
flows, and marked depreciations of leading Latin
America and the Caribbean currencies, which
could increase borrowing costs and have negative

Regional growth is expected to recover to positive territory in 2017 andgradually strengthen, underpinned by a recovery in South America.
Commodity prices are expected to gradually recover, improving fiscal andexport revenues of commodity exporters.
A. Regional growth forecasts
2017f

2018f

2019f

3

Percent change, year-on-year
2015
2016e
10

2017f

2018f

Gold

2016e

Copper

Percent
4

B. Selected commodity prices

0
-10

2
1

-20
-30

0
-1

-40

-2
South
Mexico Caribbean
America and Central
America

Iron ore

LAC

Wheat

-50

-3

Soybeans

Rising policy uncertainty among advanced
economies. Policy uncertainty increased in the
United States and the Euro Area last year. Given
that these two economies are the largest economic
partners of the LAC region, policy changes, suchas restricting trade with the region or migrationfrom the region, could have sustained
repercussions on Latin America and the Caribbean(Figure 2.3.9). Estimates show that an increase infinancial uncertainty (proxied by an increase in the
VIX index) is likely to lead to a notable reduction
in investment growth in EMDEs generally, and
LAC countries in particular. Moreover, should
policy uncertainty weigh on advanced economy
growth, slower U.S. and Euro Area growth could
have additional negative effects on EMDE growthand investment (Figure 2.3.10).

FIGURE 2.3.8 Regional outlook

Crude oilwould likely have differentiated effects acrossthe sub-regions, the realization of an individual
risk or a combination of risks would weigh onregional growth.

121

LATIN AMERICA AND THE CARIBBEAN

Sources: World Bank.
Notes: Regional and subregional aggregates are presented as GDP-weighted averages.
e=estimated, f=forecast.
A. Regional and subregional country coverage is as in Table 2.3.1.

repercussions for debt repayment in the region’s
more vulnerable economies.3

Policy challenges
The Latin America and Caribbean region is on theverge of recovery after two years of recession.
Given low growth among the region’s major
trading partners, and with commodity prices
stabilizing around current lows, supporting acyclical recovery is an immediate high-priority
challenge. For the medium term, economies must
focus on structural reforms to rebuild policy
buffers, to reduce dependence on primarycommodities, and to increase investment. Suchreforms will harness advances in productivity as
the engine of growth (de la Torre, Didier, andPinat 2014).4
Supporting the recovery. The regional outlook
assumes a bottoming out and recovery of the
3LAC economies have continued to de-dollarize (in terms of bankdeposits in dollars) since the global financial crisis (Catao andTerrones 2016). This could have positive or negative impacts on debt
repayment obligations, depending on the direction of exchange rate
movements.
4Celasun et al. (2015) argue that rebuilding fiscal buffers, which
deteriorated in the aftermath of the global financial crisis, should
be an important priority for large LAC economies. They show that,across Brazil, Colombia, and Mexico consolidations of about
2-3 percentage points of GDP are necessary to allow debt ratios totrend down.

122

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.3.9 Risks of uncertainty in major advanced
economies
The United States and the European Union account for more than half ofexports and over four-fifths of remittance inflows. For South America, theEuro Area is the largest economic trading partner and source of capital
flows, while Mexico and Central America and the Caribbean are deeply
connected to the United States. Heightened policy uncertainty in the
United States could decrease investment in EMDEs and impact growth,
including in the LAC region.

A. LAC: Trade and financial
exposures to major economies
Percent of total
U.S.
China

100

EU

Japan

B. South America: Trade and financial
exposures to major economies
Other

Percent of total
U.S.
China

80

80

60

60

40

40

20

20

0

EU

Japan

Other

100

0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

C. Mexico and Central America:
Trade and financial exposures
to major economies
Percent of total
U.S.
China
100

EU

Japan

Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

D. Caribbean: Trade and financial
exposures to major economies

Other

Percent of total
U.S.
China
100

80

80

60

60

40

40

20

20

0

EU

Japan

Other

0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

E. Largest trade and financial
exposures to major advanced
economies

F. Impact of 10 percent increase in VIX
on EMDE investment growth

Percent of GDP
30
European Union

Percentage points
United States

20

0.0
-0.5

10

-1.0

MexicoGuyanaBelizeNicaragua
Ecuador

Chile
PanamaUruguay
MexicoHondurasHaiti
El Salvador
Jamaica
Guatemala0

Exports

FDI

Remittances

-1.5
-2.0
1

2

3

4
5
Quarter678Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, WorldBank.
A.-D. 2010-15 averages. Exports include goods exports only. Foreign claims refer to total claims of
BIS-reporting banks on foreign banks and nonbanks. Stock market capitalization is the market valueof all publicly-traded shares. FDI data is available only to 2014. “U.S.” stands for United States; “EU”
stands for European Union.
E. Figure shows goods exports to the United States/European Union, remittances from the UnitedStates/European Union, and FDI from the United States/European Union (all in percent of LAC
countries’ GDP). FDI is presented as a stock. Other indicators are flows. FDI calculations exclude
LAC countries with populations of less than 3 million.
F. Cumulative responses of EMDE investment to a 10 percent increase in the VIX. Solid lines indicate
the median responses and the dotted lines indicate 16-84 percent confidence intervals. The model
includes, in this order, the VIX, MSCI Emerging Markets Index (MXEM), J.P.Morgan Emerging
Markets Bond Index (EMBIG), aggregate real output and investment growth in 18 EMDEs with G7
real GDP growth, U.S. 10-year bond yields, and MSCI World Index as exogenous regressors andestimated with two lags. Vector autoregressions are estimated with sample for 1998Q1-2016Q2.

South American economy by the first half of2017. While it will be important for governments
to nurture and support the nascent recovery, most
governments in South America have limited policy
space for counter-cyclical policies. Revenues havedeteriorated sharply over the past couple of years,
due to weak economic growth and depressedcommodity prices. Monetary policy continues tobe constrained by a combination of weak growth,elevated inflation, and volatile currencies, despitesome recent easing of inflationary and exchange
rate depreciation pressures. A carefully craftedfiscal-monetary policy mix will be necessary toprovide a conducive environment for stronger
domestic demand, especially in light of larger
downside risks to global growth.
Fiscal reforms and public capital investment.
Fiscal adjustment often entails slashing investment
to key areas such as infrastructure. While thispolicy path quickly eases fiscal pressures, it fails to
address the structural weaknesses hindering
governments’ ability to decrease current spending
or increase revenue. Decreased infrastructure
investment may also inflict further harm to longterm growth. Given that investment levels in Latin
America and the Caribbean are already low
compared to other EMDE regions, and have been
contracting since 2014, it is critical forgovernments and the private sector to increase
capital investment to expand potential growth(Garcia-Escribano, Goes, and Karpowicz 2015;
Cerra et al. 2016; Box 2.3.1; Chapter 3). To
narrow fiscal deficits, governments will need toengage in deeper reforms to achieve better-quality
revenue and spending, while maintaining
investments that increase long-term growth(Corral et al. 2016). Measures to improve tax
revenue collection—such as broadening the tax
base, reducing tax evasion, and diversifying awayfrom commodity-based taxes—will help improvefiscal positions and instill confidence.
In Brazil, the National Congress recently approved
a constitutional amendment that introduces a cap
on real federal expenditure growth, and is also
discussing a pension reform. Both of these reforms
will improve medium- and long-term fiscal
prospects. In other countries, there have been
delays in implementing reforms. For example, inGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

123

LATIN AMERICA AND THE CARIBBEAN

Argentina, gas tariff hikes were temporarilysuspended by the Supreme Court in August, on
the grounds that the government had notconducted mandatory public hearings. Moremoderate gas tariff hikes were reinstated after the
hearings were held in September.

FIGURE 2.3.10 Spillovers from the United States and theEuro Area

Attracting higher value-added FDI. Given the
low savings rates in Latin America, one way of
increasing investment, while maintaining a healthyfiscal balance, is to attract more foreign direct
investment (FDI) (Becerra, Cavallo, and Noy2015). While FDI into the region is expected toincrease, experience suggests that it will likely beconcentrated in the natural resources sector.
Ideally, the region should make knowledge ortechnology-intensive FDI a priority. But toassimilate new knowledge and technology,
comprehensive reforms to domestic education andinnovation systems will be required across theregion (EIU 2016). The soft outlook for the EuroArea is a related concern, as Europe has
traditionally been the main source of FDI inhigher value-added and R&D sectors in theregion.

A. Output growth: Impact of 1
percentage-point slowdown in U.S.
output growth on EMDEs

B. Output growth: Impact of 1
percentage-point slowdown in EuroArea output growth on EMDEs

Percentage points
0.0

Percentage points
0.5

A slowdown in U.S. or Euro Area output growth would reduce output
growth in EMDEs considerably. EMDE investment would respond morestrongly, possibly reflecting investor concerns about long-term growthprospects.

0.0

-0.5

-0.5

-1.0

-1.0
-1.5

-1.5

-2.0

-2.0

-2.5
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678C. Investment growth: Impact of 1
percentage-point slowdown in U.S.
output growth on EMDEs

D. Investment growth: Impact of 1
percentage-point slowdown in EuroArea output growth on EMDEs

Percentage points
1

Percentage points
1

0

0

-1

-1
-2

-2

-3

-3

-4

-4

-5

-5

-6
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678Sources: Haver Analytics, International Monetary Fund, World Bank.
Notes: Cumulative impulse response of weighted average EMDES output growth (A.B.) or investment
growth (C.D.) at 1-8 quarter horizons to a 1 percentage point decline in growth in real GDP in the
United States (A.C.) and Euro Area (B.D.). Growth spillovers based on a Bayesian vector
autoregression of world GDP (excluding the source country of spillovers), output growth in the source
country of the shock, the U.S. 10-year sovereign bond yield pulse JP Morgan’s EMBI index,
investment (C.D.), or output (A.B.) in EMDEs excluding China and oil price as an exogenous variable.
Solid lines indicate the median responses and the dotted lines indicate 16-84 percent confidence
intervals.

124

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.3.1 Latin America and the Caribbean forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates
EMDE LAC, GDPa

0.9

-0.6

-1.4

2018

2019

2.3

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections
1.2

2015

2.6

0.1

-0.1

0.0

0.2

b

(Average including countries with full national accounts and balance of payments data only)
EMDE LAC, GDPb

0.9

-0.6

-1.4

1.2

2.3

2.6

0.1

-0.1

0.0

0.2

GDP per capita (U.S. dollars)

-0.2

-1.7

-2.5

0.1

1.2

1.6

0.1

-0.1

0.0

0.2

PPP GDP

1.1

-0.1

-0.9

1.4

2.4

2.6

0.0

-0.1

-0.1

0.2

1.0

-0.6

-1.5

0.9

2.2

2.4

0.2

-0.2

0.3

0.4

Private consumption
Public consumption

2.2

0.9

-1.2

-1.2

0.5

0.9

0.2

2.1

-0.1

0.1

Fixed investment

-1.5

-5.1

-4.9

0.4

2.3

3.4

0.4

-0.3

-0.6

-0.5

Exports, GNFSc

1.6

3.6

1.5

3.3

3.3

3.5

0.1

-2.4

-1.1

-1.5

Imports, GNFSc

0.1

-2.2

-2.4

0.2

2.1

2.8

0.8

-1.5

-1.0

-1.7

Net exports, contribution to growth

0.3

1.2

0.8

0.7

0.3

0.2

-0.1

-0.2

0.0

0.0

0.3

-1.9

-2.8

0.8

2.1

2.4

0.0

0.0

0.3

0.4

Mexico and Central America

2.5

2.8

2.3

2.1

2.7

2.9

0.1

-0.4

-0.9

-0.4

Caribbeanf

4.2

3.4

3.2

3.1

3.4

3.3

0.0

0.6

-0.1

0.2

Brazil

0.5

-3.8

-3.4

0.5

1.8

2.2

0.0

0.6

0.7

1.0

Mexico

2.3

2.6

2.0

1.8

2.5

2.8

0.1

-0.5

-1.0

-0.5

Argentina

-2.6

2.5

-2.3

2.7

3.2

3.2

0.4

-1.8

-0.4

0.2

Memo items: GDP
South AmericadeSource: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those containedin other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Cuba, Grenada,
and Suriname.
b. Sub-region aggregate excludes Cuba, Dominica, Grenada, Guyana, St. Lucia, St. Vincent and the Grenadines, and Suriname, for which data limitations prevent the forecasting of GDP
components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, República Bolivariana de Venezuela, and Uruguay.
e. Includes Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, and El Salvador.
f. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname, and Trinidad and Tobago.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

125

LATIN AMERICA AND THE CARIBBEANTABLE 2.3.2 Latin America and the Caribbean country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015

2016

2017

2018

(percentage point difference

Projections

from June 2016 projections)

Argentina

-2.6

2.5

-2.3

2.7

3.2

3.2

0.4

-1.8

-0.4

0.2

Belize

4.1

2.9

-1.0

1.5

2.0

2.5

2.0

-1.8

-0.3

-0.2

Bolivia

5.5

4.8

3.7

3.5

3.4

3.4

0.0

0.0

0.1

0.0

Brazil

0.5

-3.8

-3.4

0.5

1.8

2.2

0.0

0.6

0.7

1.0

Chile

1.9

2.3

1.6

2.0

2.3

2.5

0.2

-0.3

-0.1

0.0

Colombia

4.4

3.1

1.7

2.5

3.0

3.3

0.0

-0.8

-0.5

-0.5

Costa Rica

3.0

3.7

4.3

3.9

3.7

3.7

0.9

1.0

0.3

-0.3

Dominica

3.7

-2.5

1.3

2.8

2.7

2.7

1.5

-1.2

0.8

0.7

Dominican Republic

7.6

7.0

6.8

4.5

4.2

4.0

0.1

1.8

0.2

0.2

Ecuador

4.0

0.2

-2.3

-2.9

-0.6

1.0

-0.1

1.7

1.1

-0.6

El Salvador

1.4

2.5

2.2

1.9

2.0

2.0

0.0

0.0

-0.4

-0.3

Guatemala

4.2

4.1

2.9

3.2

3.4

3.4

0.0

-0.6

-0.3

-0.2

Guyana

3.8

3.2

2.6

3.8

3.9

4.1

0.2

-1.4

-0.1

0.1

b

2.8

1.2

1.2

-0.6

1.5

2.0

0.0

0.3

-2.5

-0.7

Haiti

Honduras

3.1

3.6

3.7

3.5

3.4

3.2

0.0

0.3

0.0

-0.1

Jamaica

0.7

1.0

1.6

2.0

2.3

2.5

0.1

0.1

-0.2

-0.3

Mexico

2.3

2.6

2.0

1.8

2.5

2.8

0.1

-0.5

-1.0

-0.5

Nicaragua

4.6

4.9

4.5

4.0

3.9

3.8

0.0

0.1

-0.2

-0.2

Panama

6.1

5.8

5.4

5.4

5.5

5.5

0.0

-0.6

-0.7

-0.7

Paraguay

4.7

3.1

3.8

3.6

3.3

3.3

0.1

0.8

0.4

-0.1

Peru

2.4

3.3

4.0

4.2

3.8

3.6

0.0

0.5

0.7

0.6

St. Lucia

-0.7

1.3

1.0

1.8

2.2

2.5

-0.3

-0.5

-0.2

0.2

0.2

0.6

2.0

2.2

2.4

2.4

-1.2

-0.4

-0.9

-0.7

St. Vincent and the GrenadinescSuriname

0.4

-2.7

-7.0

0.5

1.1

1.3

...

...

...

...

Trinidad and Tobago

0.8

-1.8

-2.8

2.3

3.6

3.2

0.2

-0.8

0.3

1.1

Uruguay

3.2

1.0

0.7

1.6

2.5

3.7

0.0

0.0

0.0

0.0

Venezuela, RB

-3.9

-5.7

-11.6

-4.3

0.5

1.0

0.0

-1.5

-0.9

-1.1

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. GDP is based on fiscal year, which runs from October to September of next year.
c. Growth rates for Suriname were not published in June 2016.
For additional information, please see www.worldbank.org/gep.

126

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.3.1 Recent investment slowdown: Latin America and the Caribbean
Investment growth in the region dropped from 12.5 percent in 2010 to -4.8 percent in 2015, reflecting political and policy
uncertainty in several of the region’s major economies, a severe terms-of-trade deterioration, and a broad-based slowdown ineconomic growth across the region. Remaining investment needs are sizable, especially in education and infrastructure.
Latin America and the Caribbean (LAC) accounted for 7
percent of global investment in 2010-15.1 During thisperiod, investment growth slowed sharply in the region,
from about 12.5 percent in 2010 to -4.8 percent in 2015,
well below its long-term (1990-2008) average of 4.6
percent. Regional investment is projected to decline
further, by more than 1 percent, in 2016.

(Argentina, Brazil, República Bolivariana de Venezuela)
and growth slowdowns in the rest of the region (Figure
2.3.1.1). In 2015, investment growth was below its longterm average in two-thirds of LAC economies and negativein one-third of them (Brazil, Chile, Ecuador, Jamaica, andPeru). Preliminary data point to a further investment
decline in the first half of 2016.

This box discusses the following questions.

The declines mark a sharp reversal of the region’s robust
investment growth before 2010, when LAC countries were
buoyed by robust overall growth prospects, still-elevatedcommodity prices, and relative political stability in theregion. During 2010-15, investment growth averaged 3.9
percent, significantly below the 7.8 percent average during
2003-08. The recent weakening of investment growth has
returned investment-to-GDP ratios near their levels in theearly 2000s. The slowdown in investment growth has beenbroad-based across various sectors, and across public andprivate investment. In light of the weakened economic
growth prospects for the region, investment growth isexpected to remain low in the short to medium term.

•

How has investment growth in the region evolved?

•

What were the main sources of the investment
slowdown?

•

What are current and prospective investment needs?

•

Which policies can address these investment needs?

The decline in investment growth in the LAC region in
2010-15 was concentrated in commodity exporters. It
reflected domestic macroeconomic challenges, a sharp
terms-of-trade deterioration resulting from declines in
global commodity prices, and slowdowns in economic
growth, with outright recessions in some cases. Current
and prospective investment needs are sizable, especially in
education and infrastructure.

How has regional investment growth evolved?
The LAC region accounted for 7 percent of global
investment during 2010-15, less than LAC’s 8 percent
share of global output. This investment underperformancereflects low investment-to-GDP ratios in LAC, averaging
around 22 percent during 2010-15, significantly below the
EMDE average of 32 percent. Current private investmentto-GDP ratios have fallen below levels prior to the global
financial crisis (IMF 2015e).
Regional investment has contracted since 2014 amid deep
recessions in several of the region’s largest economies

Note: This box was prepared by Derek Chen.
Throughout this box, unless otherwise specified, investment refers toreal gross fixed capital formation (public and private combined). For thesake of brevity, “investment” is understood to indicate investment levels.
Investment growth is measured as the annual percent change in real
investment.
1South America, with a large share of commodity exporters,
experienced the sharpest downturn in investment growthin the LAC region as these economies’ terms of trade
deteriorated sharply (World Bank 2016k; IMF 2015e).
Investment in Mexico and many other countries in Central
America has been more robust as reform agendas,
especially in Mexico, have bolstered confidence.
Investment growth has also picked up in the Caribbean,
partly due to strong construction growth supporting the
tourism sector.

What were the main sources of the investment
slowdown?
The post-crisis slump in commodity prices and associateddeterioration in the terms-of-trade triggered sharp
investment drops in commodity-producing sectors, inparticular mining, across the region (IMF 2015e, WorldBank 2016l; Figure 2.3.1.2). Investment also declined in
non-commodity-producing sectors. Public investment wascurtailed as fiscal revenues shrank and fiscal deficits
widened as a result of lower commodity prices and slowing
growth. Private investment declined as investor confidence
in growth prospects waned, especially among majorcommodity exporters (IADB 2016, IMF 2015b). PoliticalGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

LATIN AMERICA AND THE CARIBBEAN

BOX 2.3.1 Recent investment slowdown: Latin America and the Caribbean (continued)
FIGURE 2.3.1.1 Investment growth slowdown
Partly due to weak overall economic growth, investment growth slowed sharply during 2010-15. The investment slowdown
was broad-based across various sectors and across both private and public investment. Investment growth is expected toremain low and may decline further in the short to medium term.
A. Quarterly investment growth

B. Regional investment growth

C. Share of countries with investment
growth below its long-term average

Percent, year-on-year
20
LAC Central America EMDE
15

Percent
15

Percent
75

10

1990-2008 avg

2003-08 avg

10
5

5

50

0

2011

2012

2013

2014

2015

2010

2011

2012

2013

2014

2015

2015

2013

2011

2015

2013

2011

2015

2013

2011

2015

Percent

Percent
20

2003-08

2010-15

2003-08

2010-15

15
10

Chile

Colombia

MexicoPeru

PublicPublicPrivatePublicEl
Honduras Mexico Nicaragua
SalvadorPrivatePublicPrivatePublicPrivatePublicPrivate0-5

PrivateOverall

Machinery

Overall

Overall

Machinery5

Construction

0

0

EMDE

F. Composition of investment growth

Construction

25

LAC

E. Investment growth by sectors

25
20
15
10
5
0

50

2010

MCC

Machinery

Percent
75

SA

Construction

D. Share of countries with contracting
investment

25
2011

-10

2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3

-5

-10

2013

0
-5

Uruguay

Sources: Haver Analytics, International Monetary Fund, Oxford Economics, World Bank.
A. GDP-weighted averages. Includes quarterly data for Bolivia, Brazil, Chile, Colombia, Costa Rica, Guatemala, Mexico, Nicaragua, Paraguay, Peru, and Uruguay.
Central America includes Costa Rica, Guatemala, Mexico, and Nicaragua. “EMDE” stands for emerging market and developing economies.
B. Averages weighted by investment levels. “SA” stands for South America. “MCC” stands for Mexico, Central America, and the Caribbean.
E. For Chile, 2003-08 data begins in 2004.
F. Figure shows growth rates of gross fixed capital formation in constant 2010 U.S. dollars.

and policy uncertainty has also dampened investor
confidence and discouraged investment expenditures inseveral countries in recent years (Argentina, Brazil, Haiti,
República Bolivariana de Venezuela) (IMF 2016l).
Tightening financing conditions in the region further
weighed on investment. As the U.S. Federal Reserve began
to reduce monetary accommodation in 2014-15,
currencies of major commodity exporters in the region
depreciated against the dollar, some by around 30 percent
in 2015 (Brazil, Colombia). Coupled with severe weather
conditions that affected domestic food supplies, upward
pressures on inflation led some central banks in the region,
especially in South America, to raise interest rates in 201516 to contain price rises despite weak output growth(Argentina, Brazil, Chile, Colombia), further dampening
investment growth.

What are current and prospective investment
needs?
Investment needs in the region remain significant. The low
quality of infrastructure and poor skills of the labor force
are bottlenecks to the achievement of faster productivity
growth, for example in Brazil (World Bank 2016k), and topoverty reduction. Infrastructure has not kept pace withurbanization in the region (IADB 2010), while themajority of the poor in LAC are in urban areas. Immediateneeds for investment in infrastructure and education havealso been identified in country studies of Belize, Bolivia,

127

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.3.1 Recent investment slowdown: Latin America and the Caribbean (continued)
FIGURE 2.3.1.2 Correlates of investment growth slowdown
The investment slowdown has coincided with severe terms-of-trade deteriorations, sharp output growth slowdowns, slowing
FDI inflows, political tensions, and domestic policy tightening. Over the medium term, investment growth is expected toremain low.
A. Regional output growth
Percent

B. Long-term investment growth forecasts

1990-2008 avg

Percent

2003-08 avg

8

11

6

10

LAC
Chile
Peru

Argentina
Colombia

BrazilMexico

9

4

8

2
7

0

6

-2
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015

128

SA

MCC

LAC

EMDE

5
4
2010

2011

2012

C. Terms of trade changes

D. ICRG index of political stability

Percent

Index

15

70

10

68

5

2013

2014

2015

2013

2014

2015

66

0

64
-5
Energy exporters-1062

Non-energy commodity exporters

Commodity exporters

Commodity importers

60

-15
-20

Commodity importers

58
2010

2011

2012

2013

2014

2015

2010

2011

2012

Sources: Haver Analytics, Consensus Economics, World Economic Forum (2016), World Bank.
A. GDP-weighted averages. “SA” stands for South America. “MCC” stands for Mexico, Central America, and the Caribbean.
B. Consensus Economics five-year ahead investment growth forecasts.
C. GDP-weighted average annual change in terms of trade. Negative value indicates deterioration. Energy exporters include Bolivia, Colombia and Ecuador. Non-energy
commodity exporters include Argentina, Brazil, Chile, Costa Rica, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, and Uruguay. Commodity importers
include Dominican Republic, El Salvador, Haiti, and Mexico.
D. ICRG is the International Country Risk Guide, an index of political stability produced by the PRS Group. A decline indicates greater political instability.

Colombia, Costa Rica, El Salvador, Guatemala, Haiti,
Honduras, Panama, and Uruguay (World Bank 2015i-q,
and 2016l).
Infrastructure investment. On average across the 16 EMDEs
in LAC over 2008-2013, infrastructure investment
amounted to just 3.7 percent of GDP, well below the 5-6

percent of GDP required just to sustain current economic
growth rates (IADB 2016m; Bhattacharya, Romani, andStern 2012; Kohli and Basil 2010; Fay and Yepes 2003;
Calderón and Servén 2003; and Perrotti and Sánchez2011). Apart from low investment levels, the quality of
infrastructure in the LAC region is poor relative to that ofadvanced economies and Asian emerging markets. The

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

LATIN AMERICA AND THE CARIBBEAN

BOX 2.3.1 Recent investment slowdown: Latin America and the Caribbean (continued)
FIGURE 2.3.1.3 Investment needs
A number of LAC countries rank poorly on access to quality infrastructure. Important among current investment needs are
infrastructure and education, in terms of both quantity and quality.
A. Quality of infrastructure

B. Ease of accessing electricity

Rank
140

Rank
140

LAC average
EMDE average
AE average

120

100

100

80

80

60

60

40

40

20

20

Barbados
PanamaChile
EcuadorMexicoJamaica
Honduras
Uruguay
Guatemala
El Salvador
Dominican Republic
Nicaragua
Costa Rica
Argentina
Colombia
Bolivia
Peru
BrazilVenezuela, RB
Paraguay0

D. Selected health care indicators

C. Selected education indicators
Percent of per capita
income, ratio
45
Range
40

0

GuatemalaPanamaCosta Rica
Uruguay
BrazilPeru
Chile
Colombia
Argentina
Barbados
EcuadorMexicoNicaragua
Bolivia
JamaicaParaguay
El Salvador
Haiti
Honduras
Dominican Republic
Venezuela, RB

120

LAC average
EMDE average
AE average

Per capita

Percent of population
120

4500
AE

EMDEs

LAC
100

35
3000

30

80

25

60

20
1500

15

40

10

20
Range

5

AE

EMDE

LAC

0

0
Government expenditure

Pupil-teacher ratio

0
Health expenditure Improved sanitation
(LHS)
(RHS)

Improved water
source (RHS)

Sources: World Bank (2017), World Economic Forum (2016).
A. Rankings out of 138 countries.
B. Rankings out of 190 countries.
C. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary student (in percent of per capita income),
unweighted averages of 87 EMDEs, 32 AEs, and 20 LAC economies. Pupil-teacher ratio in primary education (headcount basis), unweighted averages for 165 EMDEs,
31 AEs, and 23 LAC economies. Latest available data available during 2011-15.
D. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita in purchasing power parity terms, unweighted averagesof 199 EMDEs, 34 AEs, and 31 LAC economies. Access to improved sanitation facilities (in percent of population), unweighted averages for 150 EMDEs, 33 AEs, and 28
LAC economies. Access to improved water sources (in percent of population), unweighted averages for 148 EMDEs, 34 AEs, and 30 LAC economies. Latest available
data available during 2011-15.

average LAC economy ranked 82nd out of 138 economies(around the 40th percentile) on quality of infrastructure(World Economic Forum 2016; Figure 2.3.1.3). Priority
infrastructure needs in the region include improving roadconditions through maintenance and rehabilitation(Uruguay), upgrading infrastructure relating to energy(Panama), increasing access to electricity in rural areas(Bolivia), enhancing the quality of roads and ports (Costa
Rica), and reducing the prices of electricity (Costa Rica).
Education. While public education expenditure in theregion is on par with the EMDE average, various metricsof the quality of education systems, such as the average
student-teacher ratio, fall short of EMDE comparators.

129

130

CHAPTER 2.3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.3.1 Recent investment slowdown: Latin America and the Caribbean (continued)
Urgent education needs include improved pre-school
education and access to early childhood education; better
teacher training and quality; and a reorientation of
education programs towards employer needs, such as
information technology and English language skills (Belize,
Bolivia, Costa Rica, El Salvador, Guatemala, Panama).
Public health. The region’s public health expenditures areslightly above that of EMDE comparators. Healthinfrastructure, such as access to improved sanitation andimproved water sources, exceeds that of EMDE peers.
However, urgent health care investment needs remain(World Bank 2015j, n). These include tackling
malnutrition (Guatemala), increasing access to improved
sanitation in rural and urban areas, and access to
specialized health care services for women and children(Bolivia).
Which policies can help address investment
needs?
While policy priorities differ across countries, mosteconomies in the region have limited funds to expand
public investment spending. The lack of resources places apremium on the efficiency of public investment, which
may be enhanced by leveraging public funds with publicprivate partnerships and implementing reforms tostimulate private investment.
•

Strengthening the efficiency of public investment
includes streamlining the process for the development,
approval, and selection of projects (IADB 2016).
Transparency in the project selection process and its
monitoring and coordination between multiple
stakeholders can help remove inefficiencies.

•

Several countries have begun to develop public-private
partnership frameworks (Chile, Colombia, Peru). If
designed well, these can improve the efficiency of
public investment spending (Engel, Fischer, andGaletovic 2014).

•

LAC economies rank low on ease of business startup
and tax compliance (South America and Central
America), as well as trading across borders andregistering property (Caribbean and South America)(World Bank 2017). Reforms to ease these constraints
can also encourage investment.

Growth in the Middle East and North Africa is set to accelerate through 2018 following the bottoming out ofoil prices in 2016. For oil exporting economies, despite robust growth in the Islamic Republic of Iran, therecovery will be slightly slower than expected in mid-2016, reflecting fiscal consolidation plans (Gulf
Cooperation Council countries and Iraq) and oil production capacity constraints (Iraq). Growth is projected tobe somewhat more robust in oil importers than expected in mid-2016, driven by a broad-based strengthening ofactivity in these countries. Key risks to the outlook are a weaker-than-expected rise in oil prices and conflictrelated spillovers. Challenges include staying the course with policy adjustment, particularly fiscal policy, tosupport medium-term macroeconomic stability; diversifying away from oil; developing more dynamic private
sectors; and harnessing potential demographic benefits.

Recent developments
GrowthThe Middle East and North Africa grew by an
estimated 2.7 percent in 2016, down from 3.2
percent in 2015.1 Growth was higher in oilimporting economies than in oil exporters, yet it
slowed in both groups. Regional growth was 1.5
percentage points below its 1991-2008 average(Figure 2.4.1, Table 2.4.1).
Conflict plagues the region. The failed ceasefire in
Syria in the fall of 2016, ongoing war in the
Republic of Yemen, continued struggle in Iraq
against the Islamic State (ISIS), and political crisis
in Libya make clear that the cycle of conflict
Note: This section was prepared by Dana Vorisek, with
contributions from Jongrim Ha and Hideaki Matsuoka. Research
assistance was provided by Shituo Sun.
1The World Bank’s Middle East and North Africa aggregate
includes 16 economies, and is grouped into three subregions.
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United ArabEmirates comprise the Gulf Cooperation Council (GCC); all are oil
exporters. Other oil exporters in the region are Algeria, the Islamic
Republic of Iran, and Iraq. Oil importers in the region are Djibouti,
the Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, andWest Bank and Gaza. The Syrian Arab Republic, the Republic of
Yemen, and, as of this publication of Global Economic Prospects,
Libya, are excluded from regional growth aggregates due to data
limitations. The adjustment in the country set means that aggregate
regional and subregional data in this version of Global Economic
Prospects do not match those in previous versions.

continues, with deep domestic and international
effects. Exodus and internal displacement fromconflict-affected countries has generated ahumanitarian disaster. Infrastructure has been
destroyed; access to food, water, utilities, and basic
services has been curtailed; and health conditions
have deteriorated. Cross-border spillovers—tradedisruptions, fiscal pressures from spending
demands for refugees and security, and weakened
tourism—continue to ripple through the region(Rother et al. 2016).2
The slowdown in activity in 2016 was mostnotable in Gulf Cooperation Council (GCC)
countries, where growth decelerated by nearly 2
percentage points. Oil sector weakness spread to
non-oil sectors. In addition to holding backoutput growth in oil-exporting countries, therecent period of low oil prices has been associatedwith a slowdown in investment growth,
predominantly through a severe terms-of-trade
deterioration (Box 2.4.1). Yet GDP growth in theIslamic Republic of Iran and in Iraq is estimatedto have strengthened considerably last year,
bolstered by large gains in oil production and, inthe former, a recovery in the agriculture,
2Using annual data for 1970–2014, Rother et al. (2016) find thatcountries bordering an area of high-intensity conflict experience anaverage annual decline in GDP of 1.4 percentage points. The impact
is found to be even higher, at 1.9 percentage points, for countries in
the Middle East and North Africa region.

132

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.4.1 Growth
Growth in the Middle East and North Africa slowed in 2016 in both oilexporting and oil-importing economies. In GCC countries, the non-oil
sector decelerated notably, reflecting fiscal consolidation and links to theweak oil sector. Growth in non-GCC oil exporters, on the other hand,strengthened, reflecting large increases in oil production in Iraq and theIslamic Republic of Iran. A drought in Morocco led to a large contraction in
the agricultural sector.

incidents and conflict spillovers. Only in Lebanon
has tourism picked up as arrivals from Europe
have recovered. Together with a strong real estate
sector activity, strengthening tourism contributed
to a modest growth recovery in that country
in 2016.
Current account and fiscal balances

A. GDP growth
1991-2008

Percent
10

Saudi Arabia

Qatar

Abu Dhabi

2016Q2

2016

2016Q1

2015

2015Q4

Percent
5

B. Non-oil-sector GDP growth in GCC

8

4

6

3

4

2

2

1

0
-2

2011Q22014Q2
average

Non-GCCoil
exporters

MENA

Oil
importers

GCC

0

C. Oil and gas production

D. Agricultural sector growth inMorocco

Percent growth25
Jan-Nov 2014 y/y
Jan-Nov 2015 y/y
20
Jan-Nov 2016 y/y
15Percent
15
10
5

10
5
0
-5
-10

0

In addition to constraining growth, the decline inoil prices between 2014 and 2016 led to an acute
deterioration of external and fiscal balances in oilexporting countries (Figure 2.4.2). The major
exception was the Islamic Republic of Iran, which
was relatively less impacted by the oil price plunge
because its oil proceeds had already beensignificantly reduced with the tightening ofinternational sanctions several years prior. A steep
slowdown in import growth and large public
spending cuts among oil exporters in 2016
stabilized fiscal and current account balances inmost oil-exporting countries, but only after they
had reached historically high levels.

-5

2016Q3

2016Q2

2016Q1-15
2015Q1-Q4
average

Iraq

Iran,
Islamic Rep.

KuwaitOman

United ArabEmirates

Qatar

Saudi
ArabiaAlgeria

Bahrain-10

Sources: Haver Analytics, International Energy Agency, national statistical agencies, World Bank.
A. Non-GCC oil exporters are Algeria, Iraq, and the Islamic Republic of Iran.
B. Figure shows real growth on a year-over-year basis.
C. Figure reflects growth in combined crude oil, natural gas liquid, and nonconventional oil production.
D. Figure shows real growth on a year-over-year basis. The agricultural sector represents 14 percent
of gross value added in Morocco.

automotive production, and trade and transport
sectors (IMF 2016m).
Among oil-importing economies, growth in Egypt
dipped slightly, to 4.3 percent, in FY2016.
Foreigncurrency
shortages
heldbackmanufacturing production, and tourism fell off
after the crash of a Russian airliner in the Sinai
Peninsula in October 2015. Growth in Morocco
eased 3 percentage points in 2016 to an estimated
1.5 percent, due largely to a drought-related
contraction in the agricultural sector. A notablebright spot is Tunisia, where an uptick in growthfrom 0.8 percent to an estimated 2.0 percent
reflects rising investment and government
spending. Across commodity-importing countries,
tourism sectors are still struggling from terrorist

In oil-importing economies, falling oil prices
helped Lebanon, Morocco, and Tunisia lower
their current account deficits in 2016. Egypt, on
the other hand, experienced balance of paymentpressures stemming from a drop in remittancesand official transfers (more than 70 percent ofremittances to Egypt came from GCC countries in2014 and 2015) and weakened tourism activity
following several high-profile terrorism incidents(Figure 2.4.3). This wiped out Egypt’s progress on
reducing its current account deficit in the three
years to 2014, bringing the deficit to 5.5 percent
of GDP in fiscal year 2016.
From a weak starting position, oil importers havemade limited progress in bringing down fiscal
deficits during the period of low oil prices,
although Jordan and Morocco have shown
improvements. In Morocco, this has beenachieved through the elimination of subsidies ondiesel and gasoline and greater control of the wage
bill. Jordan has reformed fuel subsidies and its
electricity sector. However, the magnitude of fiscal
adjustment in oil-importing countries has been
insufficient to put government debt on a
downward path in recent years. Debt stands at

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

B. Fiscal balances

Percent of GDP
16

Percent of GDP

8

4

4

0

0

-4

-4

2013

2016

C. Government spending growth, oil
exporters
Percent
25

D. Government debt

-15
United ArabEmirates

Saudi Arabia

Qatar

Oman

KuwaitIraq-25

For GCC countries, the impact of low oil prices
on the financial sector has become increasingly
pronounced. Banks’ deposit growth, particularly

2015

5
-5

2014

15

90
80
70
60
50
40
30
20
10

2013

2016

Sources: Haver Analytics, International Monetary Fund, World Bank.
A.B.D. Figure reflects the GDP-weighted average for the two country groups.

FIGURE 2.4.3 Egypt: balance of payment pressures
The detrimental impact of low oil prices on oil-exporting countries has
contributed to a drop in remittance inflows and official transfers to Egypt. At
the same time, tourism in Egypt has been negatively impacted, especiallyafter the Russian plane crash above Egypt’s Sinai and the subsequent
flight suspensions by major countries due to the perceived security risks.
Together, these trends have generated balance of payments pressures.
A. Remittances and official transfers

B. Tourism arrivals

US$ billions
5

Millions
1.4

4

1.2
1.0

3

0.6
0.4

Sources: Haver Analytics, World Bank.
A. Data is seasonally adjusted. Vertical line marks the start of the decline in global oil prices. Lastobservation is 2016Q2.
B. Data is seasonally adjusted. Vertical line marks the downing of a Russian airliner in Egypt. Lastobservation is 2016Q2.

2016Q1

2015Q3

2015Q1

2014Q3

2014Q1

2013Q3

2013Q1

2012Q3

2012Q1

2016Q2

2015Q4

2015Q2

2014Q4

2014Q2

2013Q4

2013Q2

2012Q4

2012Q2

2011Q4

2011Q2

2010Q4

2010Q2

0.2

2011Q31

0.8

Remittances
Official transfers (net)2011Q1

2

0

Financial sectors

Oil exporters
Oil importers

Percent of GDP
2015

2016

2015

2014

-8
-12

2013

-8
-12

2016

8

2015

12

2014

12

Oil exporters
Oil importers

16

Oil exporters
Oil importers

2010Q3

Inflation conditions are mixed in oil exporters. In
the Islamic Republic of Iran, tighter monetary
policy and low global food prices in recent years
have been instrumental in reducing inflation fromvery high levels early in the decade,notwithstanding the uptick observed in recent
months. In Algeria, the recent rise in inflation is
the result of a currency devaluation in 2015. Asyet, the rise in capital flows to GCC countries
does not appear to have contributed to a rise indomestic prices, and the gap between spot andforward exchange rates (a measure of speculation
about exchange rate devaluation or de-pegging)has narrowed significantly from early-2015 peaks.
Inflation in GCC countries has been relatively
stable following the removal of fuel and utility
subsidies in several countries in 2016.

A. Current account balances

Iran,
Islamic Rep.

Low global oil prices and exchange rate pegs to the
U.S. dollar have kept import prices, and hence
consumer price inflation, low (or negative) inmost oil-importing economies (Figure 2.4.4). Yet
deflation in Jordan and Lebanon is easing
somewhat. Egypt is an outlier. There, strong
inflationary pressure was accompanied by a
growing gap between the official and black market
exchange rates during FY2016 (the year ended
June 30, 2016). The gap closed following thefloating of the exchange rate in early November,but the long-delayed introduction of a valueadded tax in October (of 13 percent, and set torise to 14 percent as of fiscal year 2017/18) andrising import prices as a result of the flotation may
result in an additional jump in inflation. This will
be temporary, however, assuming monetary policy
contains second-round effects.

The drop in oil prices that began in 2014 led to an acute deterioration in
fiscal and external balances in oil-exporting countries. These balances
stabilized in 2016, in part due to sizable cuts in government spending. Oilimporting countries have made limited progress in improving current
account balances in the low oil price environment, and they face large andstill growing levels of debt.

Algeria

Inflation

FIGURE 2.4.2 External and fiscal positions

Bahrainnearly 100 percent of GDP in Egypt, almost 95
percent Jordan, and close to 145 percent in
Lebanon. The slowdown in GDP growth in 2016
in some countries (Morocco and Jordan) has also
contributed to a rise in debt-to-GDP ratios.

133

MIDDLE EAST AND NORTH AFRICA

134

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.4.4 Inflation
Reflecting exchange rate pegs and low international commodity prices,
inflation in most oil-importing economies remains low. A modest recovery incommodity prices in the second half of 2016 has contributed to a mild
increase in inflation from negative levels in Lebanon and Jordan. Egypt is
an exception, where high rates of inflation were accompanied by a
growing gap between the official and unofficial exchange rates for much of
2016, though the gap closed following the floating of the Egyptian pound inearly November.
A. Inflation: Oil-importing economies

B. Inflation: Oil-exporting economies

Percent, year-on-year
Egypt, Arab Rep.
20
LebanonWest Bank & Gaza
15

Percent, year-on-year
Algeria Iran, Islamic Rep.
20

JordanMoroccoTunisia

Iraq

GCC

15

5

0

0

-5

-5

Jan-13Apr-13
Jul-13Oct-13Jan-14Apr-14Jul-14Oct-14Jan-15
Apr-15
Jul-15Oct-15Jan-16
Apr-16
Jul-16Oct-1610

5

Jan-13Apr-13
Jul-13Oct-13Jan-14Apr-14Jul-14Oct-14Jan-15
Apr-15
Jul-15Oct-15Jan-16
Apr-16
Jul-16Oct-16

10

Sources: Haver Analytics, Iraq’s Central Statistical Organization, World Bank.
A. Data is seasonally adjusted. Last observation is October 2016 for Lebanon and Morocco andNovember 2016 for other economies.
B. GCC line reflects median of the six member economies. Data for all economies except Iraq isseasonally adjusted. The period of very high inflation that the Islamic Republic of Iran experienced
starting in early 2011, when inflation peaked at 45 percent, is not shown for ease of presentation.
Last observation is November 2016 for Islamic Republic of Iran and Oman and October for othereconomies.

FIGURE 2.4.5 Financial conditions in GCC
The impact of low oil prices on the financial sectors in GCC countries has
become increasingly pronounced, pushing down government deposits inbanks, and contributing to a rise in the cost of interbank funding in somecountries, particularly in Saudi Arabia. Reduced reliance on bankborrowing in favor of international bond issuance by GCC governments
may relieve some of the liquidity pressure in banks.

Oct-2016

Jun-2016

Oct-2015

10

Feb-2016

Jun-2015

Oct-2014

US$ billions
25
Saudi Arabia
Qatar
United Arab Emirates
20
BahrainOman
15

Feb-2015

Percent
135
Saudi Arabia
Qatar
125
United Arab Emirates
115
105
95
85
75

Jun-2014

B. International sovereign bondissuance

Feb-2014

A. Loan-to-deposit ratios

Oct-2013

conditions, as measured by banks’ loan-to-deposit
ratios, steadily tightened in 2016 as a result inseveral countries, most notably in Qatar and Saudi
Arabia (Figure 2.4.5). Central banks responded byinjecting liquidity into banks, among otheractions. For Saudi Arabia, however, central bankactions have failed to contain a rise in the cost ofinterbank funding. Increasing government relianceon international debt issuance, which rose in 2016as these countries financed large fiscal deficits, may
help to relieve some of the liquidity pressure on
domestic banking sectors.3

5
0
2014

2015

2016H1

2016H2

Sources: Haver Analytics, Dealogic, World Bank.
A. Saudi Arabia line reflects private sector loan-to-deposit ratio. For other countries, total
loan-to-deposit ratio is shown. Last observation is October 2016.
B. Data for United Arab Emirates is the sum of issuance by Abu Dhabi, Dubai, Ras al Khaimah, andSharjah. 2016H2 bar reflects issuance through December 14, 2016.

the part sourced from the government, is lagging
well behind credit growth, and is in some cases
contracting because of growing public financeneeds and slowing economic activity. Liquidity

Aside from the liquidity squeeze, banking sectors
in GCC countries have been resilient through theperiod of low oil prices, with capital ratios
adequate and non-performing loan (NPL) ratios
low. Banks are uncompetitive, however, andlending is highly concentrated among large, wellestablished firms (Caggiano and Calice 2016). In
most oil-importing countries, as well, banking
systems are broadly stable. Tunisia, with elevatedNPLs, is an exception, although banking
regulation passed in July 2016 to tighten
prudential standards and establish a deposit
guarantee fund is expected to improve banking
stability in the medium term. And while banking
sector indicators remain sound in Egypt, relianceon banks to finance growing government budget
deficits and the foreign currency shortage isrestraining business and household borrowing.
Recent reforms
Despite difficult macroeconomic conditions, there
has been progress on fiscal adjustment andstructural reform since mid-2016. Kuwait
increased fuel prices in August, as did the United
Arab Emirates in September. Oman is scheduled
to remove electricity subsidies for large users
in January. Saudi Arabia announced significant
reductions to public wage spending in September,
one of the many provisions of the National
Transformation Plan approved in June. Several
oil-exporting economies have cut capital spending.
3GCC countries have also financed deficits through sovereign
wealth funds (SWFs) and other fiscal buffers. Non-GCC oilexporting countries with large fiscal deficits (Algeria and Iraq) haverelied heavily on such sources.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.4.6 Growth outlook
Regional growth is expected to accelerate during the forecast period inboth oil-exporting and oil-importing countries but will remain well below thelong-term average in GCC countries. The outlook is highly dependent on
the path of oil prices, which has been revised up modestly since mid-2016.
The end-November OPEC agreement to cut production is not expected tosignificantly impact global oil prices.

2017

2018

2019

1991-2008

4

Outlook
Growth in the Middle East and North Africa is
forecast to recover modestly, to 3.1 percent in2017 and to 3.3 percent in 2018 and 2019, withthe pickup in activity strongest among oilimporting countries (Figure 2.4.6). Growth in oil
exporters is projected to rise at a slower pace,supported by an envisaged upturn in oil prices
from an average of $43 per barrel in 2016 to $55
in 2017, $60 in 2018, and $63 in 2019 andunchanged conflict conditions. Continued
rebalancing in the global oil market, as
consumption rises and non-OPEC supply
declines, will support the envisaged rise in prices.
Among oil exporters, the pace of recovery will be
slower than expected in June 2016, largely becauseof developments in Saudi Arabia and Iraq (Table
2.4.2). While growth in GCC countries will rise—
particularly in Qatar in 2017, with new gas
production expected to come onstream—the pace
will remain well below its long-term average. The
growth forecast for Saudi Arabia, at 1.6 percent in2017 and 2.5 percent in 2018, has been loweredas more details about the country’s fiscal andstructural adjustment plans emerged and as thescope of the slowdown in the non-oil sector
became clearer.

3
2
1

Non-GCCoil
exporters

GCC

Oil
importers0

MENA

Following two years of unrestrained output togain market share, OPEC decided at the end of
November to limit production to 32.5-33 million
barrels per day in 2017. This was followed, inearly December, by an agreement between OPEC
and non-OPEC producers to curtail production.
The plan, if implemented, would be the firstagreed production cut since 2008.

US$ per barrel
110
100
90
80
70
60
50
40
30

Historical price
Average price, 2014M7-2016M11

Current
forecast

June 2016
forecast

Sources: Haver Analytics, National Statistical Agencies, World Bank.
A. Non-GCC oil exporters are Algeria, Iraq, and the Islamic Republic of Iran.
B. Historical oil prices reflect the average of monthly data for each given year. All historical andforecasted oil prices are in nominal U.S. dollars.

Growth in non-GCC oil-exporting countries is
expected to be slightly above long-term average
rates through 2019, supported mainly by therobust Iranian outlook. Growth in the Islamic
Republic of Iran depends critically on the
successful negotiation of deals to bring foreign
investment into the country, but the forecast also
reflects the government’s intention to continue toexpand oil production. Iraq is expected toexperience a significant growth slowdown in 2017
due to oil production capacity constraints and cutsin public investment under the fiscal consolidation
program. Algeria is set to experience a slow slide in
growth rates, as spending on public works has
been slashed and meaningful tax and subsidy
reform has been delayed.
Oil-importing countries are expected to experiencea broad-based growth acceleration during theforecast period, with growth returning to justunder its long-term average by 2019. In Egypt, thepace of growth, currently envisaged to rise to 5.4
percent in FY2019 (after dipping to 4.0 percent in
FY2017), is highly dependent on two issues: howquickly the economy can adjust to the adoption of
a floating exchange rate regime that occurred in
November, and how rapidly the government
applies fiscal consolidation. Higher agricultural
sector output in Morocco is expected to support a

2018
2019

Percent
2016
5

B. Oil price outlook

2011
2012
2013
2014
2015
2016
2017

A. GDP growth

2007
2008
2009
2010

Tunisia’s parliament passed legislation that will
simplify the steps required to set up investment
projects and ease repatriation of project profits toforeign investors. Jordan enacted legislation to
enable direct investment in energy andinfrastructure projects from GCC countries (IMF
2016n). Across the region, there was anacceleration in the pace of business reforms in
2016, although the business environment remains
poor relative to other regions (World Bank 2017).

135

MIDDLE EAST AND NORTH AFRICA

136

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.4.7 Fiscal adjustment
Fiscal consolidation is needed across the region. Even by the end of theforecast period, the expected adjustment will not be sufficient to bringfiscal balances out of deficit in most countries—in both oil exporters and oil
importers.
A. Fiscal adjustment: oil-exporting
economies

B. Fiscal adjustment: oil-exporting
economies (continued)

Percent of GDP
Revenue
60

Percent of GDP
60
40
20
0
-20
-40
-60

40

10
5

0

0

-20

-5

-40

-10

-60

-15
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019

20

Algeria

Bahrain

Iraq

Percent of GDP
15
10
5
0
-5
-10
-15

Revenue
Expenditure
Balance (RHS)

2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019

Percent of GDP
15

Expenditure
Balance (RHS)

Oman

Qatar

Saudi
ArabiaKuwaitUnitedArab
Emirates-10

LebanonMorocco

2019

2018

2017

-15
2016

Jordan

-5

2019

2019

2018

2017

2016

2019

2018

Egypt,
Arab Rep.

-15

2016

Djibouti

2017

2016

2019

-10

0

2018

-5

5

2017

0

10

2016

5

Percent of GDP
Revenue
15
Expenditure
Balance (RHS)

2019

10

2018

Percent of GDP
Revenue
Expenditure
15
Balance (RHS)

2017

Percent of GDP
40
30
20
10
0
-10
-20
-30
-40

2018

Percent of GDP
40
30
20
10
0
-10
-20
-30
-40
2017

D. Fiscal adjustment: oil-importing
economies (continued)

2016

C. Fiscal adjustment: oil-importing
economies

Tunisia

Sources: International Monetary Fund, World Bank.
Note: Data for 2016 is estimated; that for 2017-19 is forecasted.

FIGURE 2.4.8 Major risks to the outlook
Risks to the regional growth outlook remain tilted to the downside. They
would arise predominantly from a slower-than-expected recovery in oil
prices and conflict-related spillovers. Elevated oil price volatility could also
set back growth by making intended government spending and investment
paths unattainable. The costs of terrorism to business in the Middle Eastand North Africa have risen rapidly since 2010, and are now higher than in
any other emerging and developing region.
A. Oil price volatility
Percent
7

B. Business costs of terrorism
Volatility
Average volatility

6
5

Index, 1-7 (1 = highest cost)
3
EAP
MNA

ECA
SAR

LAC
SSA

4

4
3
5

2
1

2016

2015

2014

2013

2012

2011

2010

2009

2008

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2007

6

0

Sources: Bloomberg, World Bank, World Economic Forum Global Competitiveness Index.
A. Volatility is the standard deviation of day-on-day changes in the price of West Texas Intermediate
oil over the previous three-month window. Average volatility is average three-month volatility over theperiod January 1, 1985–present. The last observation is December 21, 2016.
B. Data was collected via surveys, in which participants were asked: “To what extent does the threatof terrorism impose costs on businesses in your country?” Figure reflects the simple average ofcountries in each region. EAP is East Asia and Pacific, ECA is Europe and Central Asia, LAC is Latin
America and the Caribbean, MNA is Middle East and North Africa, SAR is South Asia, and SSA is
Sub-Saharan Africa. For MNA, 16 countries (but not Iraq) are included. Vertical axis is inverted forease of interpretation.

growth recovery in 2017. Jordan is poised tobenefit from a recovery in investment and exports,
the latter following the mid-2016 agreement with
the European Union to relax rules of origin for
Jordanian imports. In Lebanon, improved politicalstability following the end-October election of apresident after a two-and-a-half-year vacancy
should support higher investment, contingent on agovernment being formed expeditiously.
Even with oil prices on the rise, and a degree of
spending consolidation during the past two years,
fiscal adjustment will be needed through themedium term in most oil-exporting economies(Figure 2.4.7). While the increase in oil prices andthe implementation of major tax reforms, andprivatization (e.g., as part of the National
Transformation Plan in Saudi Arabia and thelatest International Monetary Fund program inIraq) will improve revenue generation, continued
restraint in spending will be needed. In highly oildependent economies such as those in the Middle
East, the resulting improvement in fiscal balances
would help correct current account imbalances,much more effectively than exchange rateadjustment (Behar and Fouejieu 2016). However,except for Djibouti, Kuwait, and the United ArabEmirates, the expected budget adjustments will
not be enough to bring fiscal balances out of
deficit, at least through 2019.

Risks
The primary downside risks to the outlook for theregion stem from oil prices and conflict. Thoughoil prices are projected to recover, the recovery is
expected to be modest, with prices in 2019 notmuch above the average since mid-2014, when oil
prices began to plunge (Figure 2.4.6). A
significant derailing of the expected path of oil
prices, whether from changes in supply or demandconditions, geopolitics, conflict conditions, orother sources, would be reflected in the growth
outlook and in fiscal and external balances in oilexporting economies, with adverse spillovers toneighboring economies. In addition, continuationof the elevated oil price volatility observed in 2015
and 2016 would undermine intended government
spending and investment paths, even with welllaid fiscal plans (Figure 2.4.8).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Spillovers from major economies, as well, could
impact economic conditions in the Middle Eastand North Africa. The region relies principally on
the European Union for financial flows, although
the United States contributes materially to flows
to certain countries (Figure 2.4.9). The stock of
U.S. foreign direct investment (FDI) in Egypt, forinstance, averaged 6 percent of domestic GDP
during 2010–15, and 5 percent in Qatar. Lebanon
received remittance inflows from the United Statesof more than 3 percent of its GDP during thesame period. Heightened policy uncertainty in the

Among major advanced economies, the Middle East and North Africa isreliant principally on the European Union as an export destination and asource of financial inflows, though the United States contributes materially
to financial inflows in some countries. This suggests some potential
negative effects from an increase in U.S. policy uncertainty.
A. Trade and financial exposures tomajor economies, 2010-15 average
Percent of total
U.S.
China

100

EU

Japan

Other

B. Share of major economies in world
economy, 2010-15 average
Percent of total
U.S.

China

100

EU

Japan

Other

80

80

60
60

40

40

20

20

0
GDP
GDP
(market (PPP)
exchange
rates)

0
Exports

Inward RemittancePortfolio Foreign
FDI
inflows liabilities claims

Trade Foreign Stockclaims market
capitalization

C. Largest trade and financial
exposures to major advanced
economies, 2010-15 average

D. Impact of 10 percent increase in
VIX on EMDE investment growth

Percent of GDP
50
European Union
40
30
20
10
0

Percentage points
0.0-0.5
LebanonMoroccoTunisia
JordanDjibouti

Exports

United States

Egypt, Arab Rep.
Morocco
Qatar
Libya
Algeria

Across the region, deep fiscal and structuralreforms on the horizon could trigger popular
discontent among populations reliant on
government support for products and services,with possible negative spillovers for confidence,
foreign investment, and growth. In Algeria, forinstance, long delays in tax and subsidy reform,
despite acute fiscal pressures, likely reflect thepolitical risk related to scaling back longstanding
food and fuel subsidies. Similar political risk was
likely behind Egyptian authorities’ reluctance toimplement an additional round of fuel subsidy
reductions in FY2016. The social response to
subsidy reform in the Middle East and North
Africa in recent years has been mixed. In somecountries, the process has been marked byvigorous protests. In others, compensatory
measures, such as targeted cash transfers, havecontributed to a calmer reception (Verne 2016).

FIGURE 2.4.9 Risks of uncertainty in major advanced
economies

Libya
Tunisia
Algeria
MoroccoIraq

Spillovers from existing conflicts in several
countries and a heightened incidence of terrorism,
which have already had significant damage on
physical and human capital, also remain a risk forregional growth (World Bank 2016n). The
economic, security, and humanitarian spillovers
from the prolonged conflict in Syria could have
yet more adverse spillovers on neighboring
countries. In Iraq, notwithstanding the recent
gains in the fight against ISIS, there is a mediumto long-term risk of economic disruption throughrising sectarianism. Escalating conflict-related risks
could be expected to increase economic
uncertainty and slow investment. The costs ofterrorism to business in the Middle East andNorth Africa are already higher than in otheremerging and developing regions.

137

MIDDLE EAST AND NORTH AFRICA

FDI

Remittances

-1.0
-1.5
-2.0
1

2

3

4
5
Quarter678Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, WorldBank.
A.B.C. Exports (A.) includes exports of goods only. Foreign claims refer to total claims of
BIS-reporting banks on foreign banks and nonbanks. Stock market capitalization is the market valueof all publicly-traded shares. FDI data is available only to 2014. Inward FDI and portfolio investment
are presented as stocks. Other indicators are flows. Trade (B.) includes both exports and imports.
“US” stands for United States; “EU” stands for European Union.
C. Figure shows exports to the United States/European Union, remittances from the United States/
European Union, and FDI from the United States/European Union (all in percent of GDP). Chartshows only the countries with the largest exposures to the United States and Euro Area. FDI ispresented as a stock. Other indicators are flows.
D. Cumulative responses of EMDE investment to a 10 percent increase in the VIX. Solid lines
indicate the median responses and the dotted lines indicate 16-84 percent confidence intervals.
Vector autoregressions are estimated with sample for 1998Q1-2016Q2. The model includes, in thisorder, the VIX, MSCI Emerging Markets Index (MXEM), J. P.Morgan Emerging Markets Bond Index(EMBIG), aggregate real output and investment growth in 18EMDEs with G7 real GDP growth, U.S.
10-year bond yields, and MSCI World Index as exogenous regressors and estimated with two lags.

United States or the Euro Area could potentiallyreduce these shares significantly. A growth orinvestment slowdown in either the United Statesor the Euro Area could be expected to beaccompanied by slowing output or investment
growth across emerging and developing economies(Figure 2.4.10). For GCC countries, thenormalization of monetary policy in the UnitedStates could pose an indirect risk to growth. The
cost of external financing, on which countries in

138

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.4.10 Spillovers from the United States and theEuro Area

Macroeconomic stability

A slowdown in U.S. or Euro Area output growth would reduce output
growth in EMDEs considerably. EMDE investment would respond morestrongly, possibly reflecting investor concerns about long-term growthprospects.

Sustained efforts to achieve more sustainable fiscal
positions in both oil-exporting and oil-importing
countries in the region are essential for
macroeconomic stability. Authorities who haveannounced country-level plans to broaden tax
bases and improve fiscal discipline will now needto carry them out. Credible fiscal plans and theirrobust implementation are critical to maintaining
good sovereign credit ratings and access tointernational financing.

A.

Output growth: Impact of 1
percentage point slowdown in
U.S. output growth on EMDEs

B. Output growth: Impact of 1
percentage point slowdown in EuroArea output on EMDEs

Percentage points
0.0

Percentage points
0.5
0.0

-0.5

-0.5
-1.0

-1.0
-1.5

-1.5

-2.0
-2.0

-2.5
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678C. Investment growth: Impact of 1
percentage point slowdown in U.S.
output growth on EMDEs

D. Investment growth: Impact of 1
percentage point slowdown in EuroArea output growth on EMDEs

Percentage points
1

Percentage points
1

0

0

-1

-1
-2

-2

-3

-3

Appropriate monetary and financial sector policies
will help support fiscal sustainability. Banking
sectors in GCC countries remain sound, but it ispossible that selectivity in lending may increase
and borrowing costs for public and private sector
clients will rise and that asset quality will comeunder pressure. Empirical evidence suggests thatchanges in oil prices in these countries have asignificant impact on non-performing loan ratios(Khandelwal, Miyajima, and Santos 2016;
Miyajima 2016).

-4

-4

-5

-5

-6
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678Sources: Haver Analytics, International Monetary Fund, World Bank.
Notes: Cumulative impulse response of weighted average EMDES output growth (A.B.) or investment
growth (C.D.) at 1-8 quarter horizons to a 1 percentage point decline in growth in real GDP in the
United States (A.C.) and Euro Area (B.D.). Growth spillovers based on a Bayesian vector
autoregression of world GDP (excluding the source country of spillovers), output growth in the source
country of the shock, the U.S. 10-year sovereign bond yield pulse JP Morgan’s EMBI index,
investment (C.D.) or output (A.B.) in EMDEs excluding China and oil price as an exogenous variable.
Solid lines indicate the median responses and the dotted lines indicate 16-84 percent confidence
intervals.

the region are becoming more dependent, would
rise. In addition, maintenance of currency pegs
with the U.S. dollar would require central banks
to raise domestic interest rates, despite theenvironment of subdued economic activity.

Policy challenges
Countries in the Middle East and North Africa
face four key economic challenges: ensuring
macroeconomic stability, of which sound publicfinances are a key aspect; diversifying oil-exporting
economies away from hydrocarbons; facilitating amore dynamic private sector; and harnessing thebenefits of the region’s demographic profile
through labor market reforms.

In Egypt, the central bank must navigate therecent move to a more flexible exchange rate
regime. Gradually reducing inflation is a priority,
including by ensuring that the new value-added
tax results in only a one-time increase in inflation
rather than an ongoing spiral. In the Islamic
Republic of Iran, the central bank needs tocomplete the unification of the exchange rate,
which is behind schedule, and address weaknesses
in the banking sector. Tight banking sector
supervision and regulation will help reduce highlevels of nonperforming loans and increase lowbank capital. Continued efforts to tighten antimoney laundering regulations and combat thefinancing of terrorism will help to reintegrate
Iranian banks into the global financial system.
Diversification
For oil exporters in the region, diversifying awayfrom dependence on oil is important to reduce theboom-bust cycles related to oil pricedevelopments. While there has been some progressover the long term (for example in Bahrain andthe United Arab Emirates), dependence on oil

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

The extended period of low oil prices has reinforced the need for oil
exporters to diversify their economies. Across the region, there is a need toundertake reforms to facilitate a more dynamic private sector. Such reforms
could help reduce high reliance on the public sector employment acrossthe region and, in the medium and long term, create more jobs for the large
working-age population.

A. Economic dependence onhydrocarbons
Percent of GDP
100

B. Export dependence onhydrocarbons

1996-2000
2006-1080

2001-05
2011-15

Percent of exports
100

2001-05

Percent of firms
60

Percent of population aged 15-64
70
68
66
64
62
60
58
56
54
EAP
52
MNA
50

Egypt, Arab Rep.
JordanLebanonMoroccoTunisia

50
40
30
20

Workers'
education

Tax rates

InformalsectorCorruption

Access tofinanceElectricity

10

ECA
SAR

Yemen, Rep.

Qatar

D. Working-age population

LAC
SSA

1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050

C. Firms’ perceived obstacles0

2011-15

Saudi
ArabiaUnited ArabEmirates

Oman

Iraq

KuwaitAlgeria

Bahrain

Qatar

Saudi
ArabiaUnited ArabEmirates

Oman

Kuwait

0
Iraq

20

0

Algeria

40

20Bahrain60

40

Sources: Haver Analytics; European Bank for Reconstruction and Development (EBRD), European
Investment Bank (EIB), and World Bank (2016); World Integrated Trade Solutions (WITS); United
Nations.
A. Figure shows the simple average of the share of oil and gas production in GDP over the indicatedyear spans. Qatar shows the share of mining and quarrying (which includes oil and gas) in GDP.
B. Figure shows the simple average of the share of oil and gas exports as a share of total goods
exports over the indicated year spans.
C. Individual bars reflect the share of firms choosing the indicated issue as their top obstacle infirm-level surveys conducted in 2013. “Informal sector” category was presented as “informal sector
policies” in surveys.
D. Figure shows simple average of working-age population across countries in each region. Markers
along the lines indicate the peak of the working-age population share; in Sub-Saharan Africa, theshare is expected to peak in 2075. EAP is East Asia and Pacific, ECA is Europe and Central Asia,
LAC is Latin America and the Caribbean, MNA is Middle East and North Africa, SAR is South Asia,
and SSA is Sub-Saharan Africa.

Harnessing demographic benefits
Domestic authorities across the region must adjust
policy in order to seize the benefits of the region’s
demographic profile. Not only does the region
have the highest share of working-age population
among all developing regions, but the share ofworking-age population is expected to continue togrow through 2035, much longer than in several
other emerging and developing regions. A growing
working-age population share can confer
important benefits, including higher growth andlower poverty (World Bank 2015c). However,taking advantage of this will depend on sufficient
employment opportunities for those of working

2006-1080

60

Private sector development
In oil-importing economies, as well, reforms tofacilitate a more dynamic private sector will yield
important dividends. Enterprise surveys covering
the seven oil-importing economies in the region
highlight four primary reform needs: improving
the business environment, including reducing
corruption and improving electricity supply;
reducing financial exclusion, especially for smalland medium-size firms; improving labor market
participation and labor productivity, including
bolstering employment opportunities for womenand youth and enhancing labor force skills; andincreasing openness to trade, including throughmore effective customs and trade regulations(EBRD, EIB, and World Bank 2016). The mostformidable obstacle cited in enterprise surveys,
however, is political instability.

139

FIGURE 2.4.11 Policy challenges

Political
instability

remains strong (Figure 2.4.11). Government
reliance on oil and gas for revenue is substantial.
Further, as hydrocarbon industries are largely
publicly owned, it will be important to address
shortcomings in private sector development, sothat the direct negative effects of oil pricefluctuations are not so concentrated. This includes
implementing policies to reduce reliance on jobs
in the public sector, which accounts for 80 percent
or more of employment of nationals in some
GCC countries (Sommer et al. 2016). In the shortand medium term, however, the deteriorating
environment for global trade will be a challenge todeveloping non-oil sources of export revenue.

MIDDLE EAST AND NORTH AFRICA

age. Unemployment rates, particularly among
youth, remain very high, while the capacity oflabor markets to absorb new entrants will decline
in the medium term in some countries (IMF
2016o). Demographic and labor market
conditions highlight the urgency of reducing
incentives to work in the public sector, betteraligning the skills and education of the young
workforce to market demands, and lessening labor
law rigidity. Fostering a more inclusive economic
environment may improve social cohesion(OECD 2016) and help prevent violent
extremism in the region (World Bank 2016o).

140

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.4.1 Middle East and North Africa forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates
EMDE MENA, GDPa

3.3

3.2

2.7

2018

2019

3.3

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections
3.1

2015

3.4

0.4

-0.1

0.0

-0.1

b

(Average including economies with full national accounts and balance of payments data only)
EMDE MENA, GDPb

3.4

3.2

2.6

3.1

3.4

3.5

0.5

-0.1

0.0

0.1

GDP per capita (U.S. dollars)

1.4

1.3

0.9

1.5

2.0

2.1

0.5

-0.1

0.0

0.2

PPP GDP

3.5

3.2

2.8

3.3

3.6

3.7

0.5

-0.1

0.0

0.1

Private consumption

6.3

2.3

2.8

3.0

3.4

3.5

-0.3

0.0

0.0

0.1

Public consumption

7.0

-0.5

-0.6

0.9

2.1

2.3

-2.8

-0.8

0.2

-0.1

Fixed investment

6.6

2.7

-1.4

3.7

3.5

3.9

5.3

1.0

1.9

1.2

Exports, GNFSc

2.4

0.9

4.9

5.2

4.9

5.0

-2.6

0.0

0.6

0.5

c

Imports, GNFS

7.1

-1.3

0.8

4.9

5.2

5.4

-2.2

1.3

1.6

1.2

Net exports, contribution to growth

-1.7

1.0

2.0

0.6

0.3

0.3

-0.4

-0.6

-0.4

-0.4

3.4

3.1

2.7

2.9

3.1

3.1

0.5

-0.1

-0.1

-0.1

Memo items: GDP
Oil exporters
d

3.2

3.5

1.6

2.2

2.6

2.7

0.6

-0.4

-0.1

-0.1

Saudi Arabia

3.6

3.5

1.0

1.6

2.5

2.6

0.1

-0.9

-0.4

0.2

Iran, Islamic Rep.

4.3

1.7

4.6

5.2

4.8

4.5

0.1

0.2

0.3

0.1

3.0

3.6

3.0

3.9

4.2

4.5

0.3

0.1

0.2

0.2

Egypt, Arab Rep.

3.7

4.4

4.2

4.4

5.1

5.4

0.8

0.4

0.0

0.5

Fiscal year basis

2.9

4.4

4.3

4.0

4.7

5.4

0.2

1.0

-0.2

0.1

GCC countries

Oil importers

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syrian Arab
Republic and Republic of Yemen due to data limitations.
b. Sub-region aggregate excludes Djibouti, Iraq, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Gulf Cooperation Council (GCC) countries includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

141

MIDDLE EAST AND NORTH AFRICATABLE 2.4.2 Middle East and North Africa economy forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015

2016

2017

2018

(percentage point difference
from June 2016 projections)

Projections

Algeria

3.8

3.9

3.6

2.9

2.6

2.8

1.0

0.2

-0.2

-0.1

Bahrain

4.4

2.9

2.0

1.8

2.1

2.4

0.0

-0.2

-0.2

0.2

Djibouti

6.0

6.5

6.5

7.0

7.0

7.0

0.0

0.0

0.0

0.0

Egypt, Arab Rep.

3.7

4.4

4.2

4.4

5.1

5.4

0.8

0.4

0.0

0.5

Fiscal year basis

2.9

4.4

4.3

4.0

4.7

5.4

0.2

1.0

-0.2

0.1

Iran, Islamic Rep.

4.3

1.7

4.6

5.2

4.8

4.5

0.1

0.2

0.3

0.1

Iraq

0.1

2.9

10.2

1.1

0.7

1.1

0.5

3.0

-3.6

-4.5

Jordan

3.1

2.4

2.3

2.6

3.1

3.4

0.0

-0.7

-0.7

-0.5

Kuwait

0.5

1.8

2.0

2.4

2.6

2.8

3.1

0.7

0.8

0.2

Lebanon

1.8

1.3

1.8

2.2

2.3

2.5

-0.2

0.0

-0.1

-0.2

Morocco

2.6

4.5

1.5

4.0

3.5

3.6

0.1

-0.2

0.6

-0.1

Omanb

2.5

5.7

2.5

2.9

3.4

3.6

2.4

0.9

1.0

0.8

Qatar

4.0

3.6

1.8

3.6

2.1

1.3

-0.3

-1.5

0.1

-1.9

Saudi Arabia

3.6

3.5

1.0

1.6

2.5

2.6

0.1

-0.9

-0.4

0.2

Tunisia

2.3

0.8

2.0

3.0

3.7

4.0

0.0

0.2

0.5

0.7

United Arab Emirates

3.1

3.8

2.3

2.5

3.0

3.3

0.4

0.3

0.1

0.0

West Bank and Gaza

-0.2

3.5

3.3

3.5

3.5

3.6

0.0

0.0

0.0

-0.1

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of economies’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syrian Arab Republic, and Republic of Yemen due to data limitations.
b. A recent rebasing of Oman's GDP has resulted in significant revisions to historical and forecast growth rates compared to June 2016.
For additional information, please see www.worldbank.org/gep.

142

CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.4.1 Recent investment slowdown: Middle East and North Africa
Severe terms-of-trade deteriorations and uncertainty associated with deep political changes have weighed on investment in theregion. Investment growth slowed from 4.4 percent in 2010 to 2.6 percent in 2015. Investment needs remain sizable in non-Gulf
Cooperation Council EMDEs in the region, especially in transport and energy infrastructure.
The Middle East and North Africa (MNA) accounted for
4 percent of global investment, on average, during 2010–15.1 Investment growth in the region slowed from 4.4
percent in 2010 to 2.6 percent in 2015, far below the long-term (1990–2008) average of 7.2 percent, withconsiderable divergence among oil exporters and importers(Figure 2.4.1.1).
This box discusses the following questions:•

How has investment growth in the region evolved?

•

What were the main sources of the investment
slowdown?

•

What are the remaining investment needs?

•

Which policies can help address investment needs?

The Box documents the recent slowdown in investment
growth in the Middle East and North Africa due to thesevere terms-of-trade deteriorations in oil-exporting
economies and uncertainty associated with deep politicalchanges in several oil-importing economies. Remaining
investment needs are sizable, especially in the transportand energy sectors.

How has investment growth in the region
evolved?
In 2015, investment growth remained below its long-term
average in 70 percent of EMDEs in the region, andinvestment contracted 30 percent of the EMDEs in theregion. However, investment developments have diverged
between oil exporters and oil importers since the broadbased slowdown in investment growth during 2010–13.
Investment growth in oil-exporting economies has evolved
in line with oil prices, which rose rapidly in 2010 and2011. When the steep oil price decline began in mid2014, governments initially responded with additional
fiscal stimulus, often in the form of public investment. As
Note: This box was prepared by Dana Vorisek.
Throughout this box, unless otherwise specified, investment refers toreal gross fixed capital formation (public and private combined). For thesake of brevity, “investment” is understood to indicate investment levels.
Investment growth is measured as the annual percent change in real
investment.
1a result, investment growth in oil-exporting economies
rose more than 3 percentage points in 2014, to 7.3
percent. Yet, sharp oil revenue losses and fiscal constraints
brought project delays and cancellations in 2015.
Investment growth fell to an average of 2.4 percent in2015, the slowest pace since 1994, and investment
contracted in three of the four largest oil-exporting
economies in the region (Algeria, Islamic Republic of Iran,and Saudi Arabia). Preliminary data suggest further
contraction in investment in 2016 in oil-exporting
economies. For example, Saudi Arabia, the largest
economy in the region, experienced a 16 percent year-onyear contraction in the first half of the year.
Among oil-importing countries, investment growth decelerated sharply in 2011, to 0.2 percent, when mounting
political tensions during the Arab Spring were rapidly
followed by an intensifying Euro Area sovereign debt
crisis. The sharp recovery of investment growth in 2015,
to 4.0 percent, reflected efforts to address infrastructureneeds in the Arab Republic of Egypt and Morocco, thetwo largest oil-importing economies in the region, while
investment contracted in several smaller oil importers(Jordan, Lebanon, Tunisia). The private sector
contributed more strongly than the public sector
to investment growth in Egypt, a typical pattern among
oil importers. Even with the recovery in 2015, investment
growth in oil-importing countries was still below thelong-term average of 5.1 percent. Heightened balanceof payments and fiscal pressures in Egypt were likely
accompanied by weaker investment growth in 2016.
Recently-implemented structural reforms and expansionary policy among oil-importing countries may lift
investment in the medium term, however (IMF 2016p).

What were the main sources of the investment
slowdown?
A severe terms-of-trade deterioration in oil exporters, farreaching political changes, and spillovers from armed
conflict in several countries in the region weighed heavily
on activity and sentiment. As growth prospects dimmed,
especially among oil-exporting countries, investment
growth slowed sharply across the region.
Oil-exporting countries—where oil and gas accounts for,on average, 40 percent of GDP, 70 percent of fiscal
revenues, and 80 percent of goods exports—have been

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

MIDDLE EAST AND NORTH AFRICA

BOX 2.4.1 Recent investment slowdown: Middle East and North Africa (continued)
FIGURE 2.4.1.1 Investment growth slowdown
Investment growth slowed from 4.2 percent in 2010 to 0.5 percent in 2015. The slowdown reflects a severe terms of trade
deterioration in oil exporters, spillovers from armed conflict, and worsening political uncertainty in oil importers.

Percent
Below long-term average
75

Percent
12
8
4
0
-4
-8
-12
-16

MNA

MNA oilexp.

MNA oil
imp.

EMDE

1990-2008 avg

02010

D. GDP growth
Percent
8

2003-08 avg

2011

2012

2013

2014

2015

Percent
20

Index, 0-100 (100=best)
68
66
64
62
60
58
56
54
Oil exporters52
Oil importers
50
2010 2011 2012

-10

2

-20

MNA oil
imp.

2012

2010

2014

2012

2010

2014

2012

MNA oil
exp.

2014

MNA

2010

2014

2012

2010

0

LebanonF. ICRG index of political risk

0

4

JordanE. Terms of trade changes

106

Egypt,
Arab Rep.

-30

EMDE

-40

Oil exporters
Oil importers
2010

2011

2012

2013

2014

2015

2013

2015

2014

2014

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

25

Private201550

Public2014

Contracting

2015

2003-08 avg

C. Composition of investment growth

2014

1990-2008 avg

2012

2010

Percent
14
12
10
8
6
4
2
0
-2
-4

B. Economies with investment growth
below long-term average or negative2015

A. Investment growth

UnitedArab
Emirates

2014

2015

Sources: Haver Analytics, Political Risk Services Group (PRS), World Bank.
A. Averages weighted by investment levels. Oil exporters include Algeria, Bahrain, the Islamic Republic of Iran, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates.
Oil importers included Djibouti, Egypt, Jordan, Lebanon, Morocco, and Tunisia. “EMDE” is emerging market and developing economies.
B. Economy coverage is the same as for panel A.
C. Figure shows growth rates of gross fixed capital formation in constant 2010 U.S. dollars.
D. Averages weighted by GDP levels. Oil exporters include Algeria, Bahrain, the Islamic Republic of Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United ArabEmirates. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza.
E. Investment-weighted averages. Oil exporters include Algeria, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates. Oil importers include Egypt, Jordan, Lebanon,
Morocco, and Tunisia.
F. ICRG is the International Country Risk Guide, produced by the PRS Group. Chart shows investment-weighted averages of country-specific political risk indexes in the
ICRG. An increase denotes greater political stability. Oil exporters include Algeria, the Islamic Republic of Iran, Iraq, Kuwait, Oman, Saudi Arabia, and the United ArabEmirates. Oil importers include Egypt, Jordan, Lebanon, Morocco, and Tunisia.

hard-hit by the sharp oil price decline since mid-2014. The
terms of trade of oil exporters in the region deteriorated
sharply between 2011 and 2015. Panel regression estimatessuggest that the terms-of-trade shock accounted for nearly
all of the slowdown in investment growth (Chapter 3). A
two-year growth contraction in the Islamic Republic of
Iran in 2013 and 2014 also contributed to the slowdown.

What are the remaining investment needs?

In oil importers, deepening political uncertainty associatedwith profound institutional changes in 2011 weighedheavily on investment. Political risk deteriorated
particularly sharply in Egypt and Tunisia, where civil
uprisings led to regime change, and has not yet recovered
to 2010 levels. Developments in the larger economies in

A ramping up of infrastructure investment is needed across
MNA (Figure 2.4.1.2). In oil-importing and non-GCC
oil-exporting countries, where the quality of infrastructureis on par with that in all EMDEs, there is significant
underinvestment in the transport (in particular, roads) andelectricity sectors. In Lebanon, frequent blackouts makethe region had spillovers to confidence in the smaller ones
(World Bank 2015r). On average, such politicaluncertainty may have been associated with slower
investment growth of approximately 1.5 percentage points
during 2011–15 (see Chapter 3).

143CHAPTER 2.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.4.1 Recent investment slowdown: Middle East and North Africa (continued)
FIGURE 2.4.1.2 Infrastructure, health, and education indicators
Infrastructure investment needs are high, especially in electricity and transport. While the Middle East and North Africa performs well relative to other EMDEs on basic health measures, it is at or below the EMDE average in terms of education indicators, despite considerable long-term gains.
A. Infrastructure investment needs

B. Quality of infrastructure

US$, billions

Oil importers

25

Non-GCC oil exporters

Index, 1-7 (7=best)
6

GCC

Oil importers

Non-GCC oil exporters

GCC

EMDE

20
5
15
4
10
3

5

0

2016

2015

2014

2013

2012

D. Selected education indicators

C. Selected health care indicators
Per capita

Percent of population
120

4500

Percent of per capita
income, ratio
45

4000
100

40

80

35

3500
3000

Range

AE

EMDEs

MNA

30

2500
60
2000
1500
1000

2011

Water andsanitation

2010

ICT

2009

Transport

2008

2Electricity

2007

144

40
Range

AE

EMDE

MNA

25
20
15

20

500

10

0

0
HealthImproved
expenditure (LHS) sanitation (RHS)

Improved water
source (RHS)

50
Government expenditure

Pupil-teacher ratio

Sources: Estache et al. (2013), World Economic Forum Global Competitiveness Index, World Bank.
A. Values are constant 2005 U.S. dollars and indicate annual investment needs for 2011-20. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, and Tunisia. Non-GCC oil exporters include Algeria, the Islamic Republic of Iran, Iraq, Libya, Syria, and the Republic of Yemen. Gulf Cooperation Council (GCC) countries include
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
B. Unweighted averages of survey data. Data was collected using the question: “How would you assess general infrastructure (e.g., transport, telephony, energy) in yourcountry? (1 = extremely underdeveloped—among the worst in the world; 7 = extensive and efficient—among the best in the world).” Oil importers include Egypt, Jordan,
Lebanon, Morocco, and Tunisia. Non-GCC oil exporters include Algeria, the Islamic Republic of Iran, Libya, and the Republic of Yemen. GCC countries include Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
C. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita in purchasing power parity terms, unweighted averagesof 199 EMDEs, 34 AEs, and 17 MNA economies. Access to improved sanitation facilities (in percent of population), unweighted averages for 150 EMDEs, 33 AEs, and19 MNA economies. Access to improved water sources (in percent of population), unweighted averages for 148 EMDEs, 34 AEs, and 18 MNA economies. Latest available data available during 2011-15.
D. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary student (in percent of per capita income),
unweighted averages of 87 EMDEs, 32 AEs, and 8 MNA economies. Pupil-teacher ratio in primary education (headcount basis), unweighted averages for 165 EMDEs,
31 AEs, and 14 MNA economies. Latest available data available during 2011-15.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

MIDDLE EAST AND NORTH AFRICA

BOX 2.4.1 Recent investment slowdown: Middle East and North Africa (continued)
electricity a binding constraint to competitiveness anddoing business, and in recent years this was also the case in
Egypt (World Bank 2015r; Le Borgne and Jacobs 2016).
Large numbers of Syrian refugees in Jordan and Lebanon
have compounded existing strains on infrastructure in
those countries. In Syria, the cost of rebuilding
infrastructure damaged or destroyed by war is estimated to
be on the order of $100–200 billion (Gobat and Kostial
2016). Iraq, as well, faces large infrastructure investment
needs, which have risen as a result of conflict.

MNA scores well relative to other emerging anddeveloping regions on basic health measures. However, theregion is at or below the EMDE average in terms ofeducation indicators, despite considerable long-term gains(World Bank 2011). MNA does not necessarily need toincrease the level of investment in education, which has
risen substantially over several decades, but rather to invest
with the goal of increasing the quality of education,
thereby supporting growth and lowering poverty (WorldBank 2008).

GCC countries also have outstanding infrastructure
investment needs, predominantly in electricity generation.
With higher income levels, however, these countries also
have greater capacity to fulfill such needs (IMF 2014a).
GCC countries’ planned medium-term public spending on
infrastructure generally tracks their infrastructure
investment needs, while planned spending in oil-importingand non-GCC oil-exporting countries lags far behindneeds (Ianchovichina et al. 2013).

Which policies can help address investment
needs?

Besides contributing to growth, higher investment ininfrastructure could also help improve labor market
conditions in MNA. One study estimated that each $1
billion of infrastructure investment has the potential togenerate 110,000 infrastructure-related jobs, on average, in
oil-importing MNA countries (Estache et al. 2013). It is
key that countries prioritize investment projects to suitcountry conditions, however.

Several policy measures could support investment in
MNA. Across the region, the scaling back of subsidies
since 2014 has created space for increased public spending
on investment in infrastructure, health, and education(IMF 2016p). High public sector wage expenditures could
be reduced, with funds reallocated to investment.
Improvements in governance and investor protection
could also support private sector investment, as could
incentives to undertake public-private partnerships (e.g.,in Morocco; EBRD 2015a). In some oil importers, theelectricity sector would benefit from additional
privatization (Lebanon) or efforts to incentivize the private
sector’s contribution to electricity generation (Egypt).
Finally, improved security conditions in the region are a
prerequisite for a sustained pickup in investment.

145

Economic activity in South Asia expanded by an estimated 6.8 percent in 2016, buoyed by robust domestic
demand. India continued to post strong growth, reflecting ongoing tailwinds from low oil prices and support
from structural reforms. Excluding India, regional growth is estimated at 5.3 percent in 2016; however, there
were notable differences within the region depending on security issues, domestic policies, and reliance on
remittance flows. Looking ahead, growth in the region is projected to edge up to an average of 7.3 percent in2017-19, supported by dividends from ongoing policy reforms and strong domestic demand. Sluggish recovery
in key export markets, weak private investment, and security challenges pose headwinds to the outlook. Risks aretilted to the downside, including reform setbacks, heightened domestic insecurity and political tensions, andunexpected tightening of financing conditions. Structural reforms, aided by supportive macroeconomic policies,
could help mitigate some of the risks, and bolster the region’s long-term growth prospects.

Recent developments
GrowthSouth Asia’s growth remained steady at an
estimated 6.8 percent in 2016, the same pace as in2015, buoyed by robust domestic demand (Figure
2.5.1). South Asia is now the fastest-growing
emerging market and developing economy(EMDE) region. Since 2013, the region has
consistently exceeded its long-term growth averageof 6 percent during 2000-14, benefitting frommutually reinforcing tailwinds of sustained low
commodity prices, infrastructure investment, andgenerally accommodative monetary and fiscal
policies. Limited global integration has shieldedSouth Asia from negative external spillovers(World Bank 2016e). Growth in India (a country
that represents four-fifths of South Asia’s GDP)is estimated to reach 7.0 percent in FY2017(ending on 31 March 2017), accounting for muchof the region’s expansion. Excluding India, theregion grew 5.3 percent, with wide variations
among countries (Table 2.5.1). Regional growth isNote: This section was prepared by Boaz Nandwa with contributions from Jongrim Ha and Hideaki Matsuoka. Research assistance
was provided by Anh Mai Bui and Shituo Sun.

slightly below June projections, mainly reflecting amodest downgrade to India’s brisk expansion.
India’s growth in the first half of FY2017 wasunderpinned by robust private and public
consumption, which offset slowing fixed
investment, subdued industrial activity, andlethargic exports (Figure 2.5.2). Consumption was
supported by lower energy costs, public sector
salary and pension increases, and favorable
monsoon rains, which boosted urban and rural
incomes. Economic activity also benefitted from a
pickup in foreign direct investment (FDI) and anincrease in public infrastructure spending.
Unexpected ‘demonetization’—the phasing out oflarge-denomination currency notes which were
subsequently replaced with new ones—weighedon growth in the third quarter of FY2017.1 Weakindustrial production and manufacturing andservices purchasing managers’ indexes (PMI),
further suggest a set back to activity in the fourth
quarter of FY2017. A retrenchment in private

1On November 8, 2016, the Indian government announced
phasing out of large-denomination currency notes (Rs. 500 and Rs.
1,000, representing 86 percent of the total currency in circulation) as
legal tender. They were immediately replaced with new Rs. 500 and
Rs. 2,000 currency notes. This was undertaken to curb corruption, tax
evasion, and counterfeiting. The withdrawal from circulation started
immediately and ended on December 30, 2016.

148

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.5.1 Economic activity in South Asia
Growth in South Asia region (SAR) is estimated to remain steady at 6.8
percent in 2016, supported by robust domestic demand. South Asia’s
strong growth, driven by solid activity in India, exceeded the average of
EMDEs. Excluding India, growth edged up to 5.3 percent, with significant
heterogeneity across the countries. The region’s growth is projected tostrengthen to an average of 7.3 percent during 2017-19, benefitting frompolicy reforms and accommodative monetary and fiscal policies.
A. GDP Growth in SAR

2017f

2000-2014

Consumption
Exports
GDP

Percent
20

Investment
Imports

10

2016e

2015

EMDE

SAR
(incl. India)

SAR(excl. India)

EMDE

SAR

1990-2008

Investment

2016e

Consumption

Investment

2015

Consumption

Investment

2016e

2015

2014

2013

2015

2016e

2014

2013

2015

Percent
10
8
6
4
2
0

2016e

Percent, year-on-year
87
65
1990-2008
4
3
2
1
0

2014

D. Growth: Components of GDP

2013

C. GDP Growth: SAR vs. EMDE

Consumption

2014

-10

2013

Afghanistan

Nepal

Pakistan

Maldives

0
Sri Lanka

SAR

BhutanBangladesh

India

Percent, year-on-year
12
2015
2016e
10
8
6
4
2
0

B. Growth: Components of GDP

SAR(excl. India)

Sources: Haver Analytics, World Bank.
A.-D. SAR is the South Asia region, comprised of the following: Afghanistan, Bangladesh, Bhutan,
India, Pakistan, Maldives, Nepal, and Sri Lanka. 2016e is the estimated value and 2017f is forecast
value.
C.D. EMDE refers to emerging market and developing economies.

investment, reflecting excess capacity, corporate
deleveraging, and credit constraints due toimpaired commercial banks’ balance sheets, also
had an adverse effect on activity (Chapter 3; Box
2.5.1). For the whole of FY2017, growth isexpected to decelerate to a still robust 7.0 percent.
In Pakistan, GDP growth (at factor cost) is
expected to rise to 5.2 percent in FY2017 (ending
30 June 2017; Table 2.5.1). The uptick in activity
was spurred by a combination of low commodity
prices, rising infrastructure spending, and reforms
that lifted domestic demand and improved thebusiness climate (World Bank 2016p). The
successful conclusion of Special Drawing Rights(SDR) 4.393 billion IMF Extended Fund Facility(EFF) program, aimed at supporting reforms andreducing fiscal and external sector vulnerabilities,
lifted consumer and investor confidence. On
October 5th, 2016, Pakistan tapped theinternational market and issued a $1 billion fiveyear dollar-denominated Sukuk (Islamic) bond.
The interest rate paid on the bond was lower
compared to what the country paid two years ago
for raising a similar amount using the same
instrument. These positive factors more thanoffset weak industrial activity, the adverse impactof unfavorable weather on agriculture output, andterrorist attacks in urban areas.
In Sri Lanka, growth remained steady at 4.8
percent in 2016 from the previous year, boosted
by strong activity in the construction and services(particularly tourism) sectors, as well as
resumption of the $1.4 billion Colombo Port City
real estate project. In addition, a loan of $1.5
billion from the IMF, under the EFF program,relieved balance of payments stress (IMF 2016q).
However, flooding, a slowdown in exports, and a
deceleration in private investment weighed on
activity. Bangladesh’s growth is expected to ease toa still solid 6.8 percent in FY2017 (ending on 30
June 2017), from the official estimate of 7.1
percent in the previous fiscal year. Domestic
security challenges compounded weak external
demand and a mild pickup in private investment,
offsetting an uptick in infrastructure spending andincreased public sector wages (World Bank
2016q).2 A slowdown in oil-rich Gulf
Cooperation Council (GCC) economies has led toreceding remittances inflows to both Bangladesh
and Sri Lanka, dampening private consumption
and investment (De et al. 2016).
Elsewhere in the region, growth was mixed (Table
2.5.2). Nepal is set to rebound to an estimated 5.0
percent growth in FY2017 (ending on 15 July2017), up from 0.6 percent posted in FY2016. An
acceleration in post-earthquake reconstruction,
together with favorable monsoon rains, will
support economic activity. Lifting of the southernborder blockade with India has normalized tradeand eased supply-side bottlenecks. A slowdown ingrowth of remittances inflows from the GCC
countries, however, has weighed on consumption
and investment. Bhutan’s growth ticked up to an
2Bangladesh became one of the first countries to receive financing
of a $165 million loan in 2016 from the Asian Infrastructure
Investment Bank (AIIB) for electricity grid coverage expansion andan additional $60 million to build a gas transmission pipeline from
Chittagong to Bakhrabad.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.5.2 Economic activity in India
India accounts for almost four-fifths of SAR GDP. Robust private andpublic consumption is likely to offset slowing fixed investment, weak
manufacturing activity, and lethargic exports In India.
A. India GDP Growth

Inflation
Regional inflation decelerated from 8.9 percent
in 2015 to 5.7 percent in 2016, aided by
improved harvests after favorable monsoon rains(Bangladesh, India, Sri Lanka), fiscal restraint(India, Pakistan), and pass-through of nominal
exchange rate appreciation (Bangladesh, Pakistan).
Reductions in administered prices (India)
and lower energy costs contributed to easing
inflationary pressures (Chinoy, Kumar, andMishra 2016). With inflation in most countries
within central bank target bands (Figure 2.5.4),
monetary policy stances across the region
remained broadly accommodative, except for Sri
Lanka, where policy was tightened in the second

Index
60

BrazilChina

Russia50

Nov-16

Jul-16

Sep-16May-16

Jan-16

Mar-16

Jul-15

Nov-15Oct-16Aug-16

Apr-16Jun-16

Feb-16Oct-15

2016Q3

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

Dec-15-60

Aug-15-6-2

Apr-15

-4

20
0
-20
-40

0

Jun-152

Feb-15Percent, annualized quarter-on-quarter
India
Pakistan80
Sri Lanka
Bangladesh
60
40

Sri Lanka

4

2014Q3

Sep-15

D. Merchandise exports

Dec-14

Percent, quarter-on-quarter
8
India
Pakistan
6

May-15Jan-1540

Mar-15Investment

Consumption

Net exports

45

C. Industrial production

2014Q2India

55

External balances
Lower energy import bills mitigated the negative
impact of reduced exports and remittances oncurrent account balances which, except for
Bangladesh, mostly continued to be in the deficit(Figure 2.5.3). Higher capital inflows contributed
to reserves accumulation and helped stabilize thevalue of local currencies against the U.S. dollar. Ina few countries (India, Pakistan), the tradeweighted real exchange rate appreciated,
weakening export competitiveness (Eichengreen
and Gupta 2013). Subdued external demand andincreased non-energy imports in Sri Lanka
weighed on its current account balance. In
Bhutan, the current account deficit remained
elevated, reflecting increased imports for theconstruction of hydropower projects. Increased
imports for post-earthquake reconstruction amid
receding remittances in Nepal worsened its current
account balance.

B. Purchasing Managers’ Index (PMI)

Change since 2014Q3
Change since 2015Q3

Percent
16
12
8
4
0
-4
-8

GDP

estimated 7.4 percent in 2016, lifted by tourism
and construction of three major hydropower
projects. Growth in Maldives rose to 3.5 percent
in 2016, driven by construction and public
infrastructure spending. Afghanistan recorded theweakest growth in the region, estimated at 1.2
percent in 2016. This is largely due to slowing
domestic demand, deteriorating security, anddrought which affected agriculture output.
Resettlement of returning refugees from Pakistan
further exerted fiscal pressure, constraining
infrastructure investment.

149

SOUTH ASIA

Sources: Haver Analytics, World Bank.
A. Real GDP growth change since 2014Q3 is the two-year quarterly change. The latest data point is
2016Q3.
B. Index numbers greater than 50 denotes expansion and vice versa.
C. Industrial production data is seasonally adjusted. The last observation is 2016Q3 for India andPakistan, and 2016Q2 for Sri Lanka.
D. Exports measured in values. The last observation is October 2016 for India and Pakistan,
September for Sri Lanka and August for Bangladesh.

half of 2016 to contain rising inflation and tostabilize the Sri Lankan rupee.
Fiscal positions
Budget consolidation in Pakistan and Sri Lanka
helped lower structural fiscal deficits in 2016,
bringing them below the 2010-13 average of 7
percent of GDP (Figure 2.5.5). Reductions inenergy subsidies and an increase in excise taxes
eased spending pressures (India, Pakistan, Sri
Lanka), but this was partly offset by public sector
wage increases (Bangladesh, India), as well as
political disagreements in the coalition
government on spending priorities (Sri Lanka).
Some efforts were made across the region to raise
revenues. In India, a one-off revenue windfall
from the Income Disclosure Scheme was offset byshortfalls from the telecommunication spectrum
auction. Besides curbing discretionary spending,
Sri Lanka’s revenue-raising efforts gained traction
under the IMF’s EFF program, notably by

150

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.5.3 External sector developments
Lower energy import bills helped contain current account deficits but werepartly offset by diminished remittances from the GCC countries. FDI
inflows, mainly to India and Pakistan, contributed to an accumulation ofreserves.
A. Current account balance
Percent of GDP

2013

2014

B. FDI inflows

2015

2016e

Percent of GDP
India

2.5

2
1
0
-1
-2
-3
-4

Pakistan

2.0
1.5
1.0

2014

2015

2015

2000-2007

Pakistan

Sri Lanka

2013
2014

Nepal

C. Reserves

0.0

2012

Pakistan

Sri Lanka

India

Bangladesh

0.5

D. Remittances inflows

Months of imports

2015 Jan

14
12
10
8
6
4
2
0

LatestPercent of GDP
2013
40
30
20
10

South Asia

India

Bangladesh

Pakistan

Sri Lanka

India

Bangladesh

0Sources: Haver Analytics; World Development Indicator, World Bank; World Economic Outlook,
International Monetary Fund.
C. Reserves coverage are months of imports covered. The last observation is October 2016.

lowering the value-added tax (VAT) threshold forwholesale and retail trading, reduced exemptions,and greater tax collection efficiency (World Bank
2016r). In several economies, privatization receipts
from state-owned enterprises (SOE) fell short of
expectations (India, Pakistan). Large-scaleborrowing to fund infrastructure projects(Maldives, Pakistan, Sri Lanka) has led to elevatedpublic debt (Benno and Ramayandi 2015).
Reforms
Notwithstanding remaining room for an improvement in regional business climates, investor
confidence in South Asia has been lifted bypositive progress in the policy environment (Lopez‐Acevedo, Medvedev, and Palmade 2016; Borin
and Di Stefano 2016; World Bank 2016p).
Four key reforms in India were passed in 2016.
First, a bankruptcy and insolvency code wasenacted, making it easier to close failing businesses

and recover debts. Second, rules governing FDI
underwent sweeping liberalization, allowing for
100 percent ownership in previously restrictedsectors. Third, the Goods and Services Tax (GST)
Amendment Bill was passed; this aims tostreamline the country’s complex tax system,
reduce fragmentation in markets for goods andservices, lower business costs, and widen the tax
base. Fourth, the government and the Reserve
Bank of India agreed on a monetary policy
framework that includes setting up a monetary
policy committee and agreeing on a flexible
inflation target, with a 2–6 percent range. Thisshould enhance the Reserve Bank of India’s
operational independence, and help to anchor
inflation expectations (Mishra, Montiel, andSengupta 2016; Cabral, Carneiro, and Mollick
2016; Samarina, Terpstra, and De Haan 2014). In
addition, the Reserve Bank of India strengthenedbank resolution procedures by establishing a single
Financial Resolution Authority (FRA) thatbrought state-owned banks under the resolution
framework and placed restrictions on the usage ofbail-ins clause resolutions. Robust implementationof these legislative changes will be key totransforming the accompanying boost to
confidence into greater activity.
Pakistan implemented various reforms under the
IMF’s EFF program and World Bank’s
Development Policy Credits; tackling key
structural challenges, such as, reforms to easeenergy constraints, tax policy and administrativereforms to raise revenues, and strengthening
independence of the State Bank of Pakistan toreduce vulnerabilities. In addition to undertaking
reforms under the IMF’s EFF program, Sri Lanka
received $100 million from the World Bank in
mid-2016 to support the government’s reform
agenda in reducing impediments to private sector
competitiveness, increasing transparency, andimproving fiscal sustainability (World Bank
2016s). Bhutan’s government approved a debt
policy in 2016 aimed at ensuring public debt
sustainability by establishing an external debt
threshold and implementing a Medium-Term
Debt Management Strategy. Despite these
improvements, critical land and labor reforms
have largely stalled in most of the region.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

A. Nominal exchange rates

Sri Lanka

B. Real effective exchange rate

Bangladesh

CPI

India
Pakistan110
100Jul-16Oct-16

Apr-16

Jan-16

Jul-15Oct-15

Apr-15Jan-15

Jul-14Oct-14Apr-14Jan-14Jul-16Oct-16

Apr-16

Jan-16

Jul-15Oct-1590

C. Inflation rates
Percent
10

Index, Jan 2014=100130120

Apr-15Jan-15

Jul-14Oct-14Apr-14

LCU per US dollar
160 India Pakistan
140
120
100
80
60
40
20
0

D. Central bank policy rates

Inflation target

Core inflation

Percent
8

India
Sri Lanka

8
6

Pakistan
Bangladesh

7

4
2

6

Nov-16Aug-16May-16

Feb-16Aug-15

Nov-15

5May-15

Sri Lanka

Pakistan0

India

Accommodative monetary policy stance is
expected to support activity (Bangladesh, India,
Pakistan). With oil prices projected to stay
subdued (World Bank 2016t), regional inflation is
forecast to remain below an average of 6 percent
during 2017-19, providing space for ongoingmonetary policy accommodation and supporting
real incomes and consumption. Fiscal policy isalso likely to become more accommodative as aresult of additional fiscal spending due to public
sector wage hikes (Bangladesh, India) andapproaching general elections in 2018 (Pakistan)and 2019 (India).

Nominal exchange rates remained broadly stable, with trend appreciationin the real effective exchange rate in India and Pakistan. Modest domestic
inflation reflected low energy prices and good monsoon rains. Central
banks responded by easing monetary policy.

Jan-14Growth prospects for South Asia remain robust,albeit uneven, across the region. Regional growthin 2017 is projected at 7.1 percent, firming to 7.4
percent during 2018-19, with continued support
from strong growth in India. Excluding India,
growth will pickup to 5.5 percent in 2017 andremain broadly stable at an average pace of 5.8
percent thereafter. The growth pickup ispredicated on robust private and public
consumption, infrastructure spending, and arebound in private investment.

FIGURE 2.5.4 Exchange rate and inflation developments

Bangladesh

Outlook151

SOUTH ASIA

Sources: Haver Analytics, National Central Banks, World Bank.
A. Last observation is November 2016.
B. Last observation is November 2016.
D. Last observation is November 2016.

FIGURE 2.5.5 Fiscal developments

In Pakistan, growth (at factor cost) is forecast toaccelerate from 5.5 percent in FY2018 to 5.8

Lower energy prices enabled some countries to reduce energy subsidies(India, Pakistan), or eliminate tax exemptions (Pakistan, Sri Lanka).
However, increases in public sector wage (Bangladesh, India) and fiscal
slippages (Pakistan, Sri Lanka) could imperil the path to fiscal
sustainability.

0

2015
2010-2013-2

Percent of GDP
80

2015

2016

Sri Lanka

Percent of GDP

2014
2016e

Pakistan

B. Public debt

A. Structural fiscal balance

60

-4

40

-6
20

-8

Nepal

India

Sri Lanka

Pakistan

India

Bangladesh

0-10Bangladesh

India is expected to regain its momentum, withgrowth rising to 7.6 percent in FY2018 andstrengthening to 7.8 percent in FY2019-20.
Various reform initiatives are expected to unlock
domestic
supplybottlenecks
and
raise
productivity. Infrastructure spending should
improve the business climate and attract
investment in the near-term (Calderon, MoralBenito, and Servén 2011). The “Make in India”
campaign may support India’s manufacturingsector, backed by domestic demand and further
regulatory reforms (Siddhartha 2015). Moderate
inflation and a civil service pay hike should
support real incomes and consumption, assistedby bumper harvests after favorable monsoon rains.
A benefit of ‘demonetization’ in the mediumterm may be liquidity expansion in the banking
system, helping to lower lending rates and lift
economic activity.

Sources: Haver Analytics; International Monetary Fund; World Economic Outlook, World Bank.
A.B. 2016e means estimated value.

percent a year in FY2019-20, reflecting
improvements in agriculture, infrastructure,energy, and external demand. Construction of
the new Khanki barrage in the province of Punjab
is set to be completed in early 2017. This is

152

CHAPTER 2.5

expected to provide irrigation to one million
hectares of fertile farmland, boosting agriculture.
Ongoing progress on the gas pipeline andelectricity imports from the Islamic Republic of
Iran, will ease energy constraints. The ChinesePakistan Economic Cooperation (CPEC) projectwill increase investment in the medium-term, andalleviate transportation bottlenecks and electricity
shortages.3
Weak remittances inflows and subdued consumption are foreseen to weigh on Bangladesh’s
growth, projected to edge down to 6.5 percent in
FY2018, but rebound to 6.7 percent in FY2019
and 7.0 percent thereafter in the forecast horizon,
supported by infrastructure spending and apickup in exports. An improved security situationis also expected to attract private investment and
FDI. Construction of Padma Bridge connecting
southwest of the region with the rest of the county
and a liquefied natural gas terminal will alleviate
infrastructure and energy bottlenecks in themedium-term. However, Bangladesh’s highrecurring expenditures and a stagnant revenue-toGDP ratio will likely pose obstacles for thefunding of needed infrastructure development. In
Sri Lanka, growth is expected to climb to an
average of 5.1 percent in 2017-19, supported byincreased private consumption and an uptick in
FDI. Fiscal consolidation amounting to 3.5
percent of GDP by 2020 will lift investor
sentiment, but weigh on growth and, especially,
infrastructure spending in the near-term (WorldBank 2015t). Political deadlock in the coalition
government, on near-term spending priorities,
could hinder the pace of reforms.
Following the rebound in FY2017, Nepal’s growthis expected to ease in the forecast period in linewith the country’s potential. Continued postearthquake reconstruction efforts, uptick inmanufacturing activity, and resumption of
tourism will support economic activity. A slowing
growth of remittances—which account for a third
3 An additional $5.5 billion was committed by China in 2016
towards the construction of Peshwar-Karachi railway line, a majorcargo and human transit corridor. Further, Pakistan became one of
the first countries to receive financing of $100 million from the AIIB
towards the M-4 motorway, considered vital to the CPEC
transportation project.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017of the GDP—will continue to weigh on growth.
Inflation is projected to subside to an average paceof 8 percent in the medium-term. Continuing
reconstruction-related imports, and slowdown inremittances, are expected to turn current accountsurpluses into deficits in the forecast period.
Growth in Bhutan is projected to rise to an
average of 11.1 over the forecast horizon. The
strong rise in capital equipment spending in for
major hydropower projects will widen the current
account in the near-term, but improve growth in
the medium-term. With the commissioning ofhydropower plants in 2017-19, and increased
exports of electricity to India, the current accountdeficit is expected to narrow. Since the currenciesof Bhutan and Nepal are pegged to the Indianrupee, their exports could suffer from a lossof competitiveness should India’s currency
appreciate against major currencies (Burke andPaudel 2015). Maldives is foreseen to post an
average growth of 4.3 percent in 2017-19,
following a rebound in tourism.
Afghanistan faces a difficult path to recovery. Even
though growth is projected to climb to 1.8 percent
in 2017 and 3 percent in 2018-19, deteriorating
security, a surge in return of displaced persons,and adverse weather conditions will be a dragon activity. Under-execution of budget plans
and reductions in foreign aid will dampen
domestic demand and widen the current accountdeficit. This may be partially mitigated by thelifting of sanctions on the Islamic Republic of Iran,which could boost trade and investment for
Afghanistan (Devarajan, Ianchovichina, andLakatos 2016). In addition, low prices of oil andgas imports from the Islamic Republic of Iran could
also ease energy constraints and alleviate current
account pressures.

Risks
Risks to the outlook are tilted to the downside.
Domestic risks include: slippages in addressing
fiscal imbalances, further deterioration in financial
and corporate sector stability (Bangladesh, India),rising debt levels (India, Maldives, Pakistan, Sri
Lanka), and persistent security and politicaltensions (Afghanistan, Bangladesh, Maldives,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017High levels of non-performing bank loans(Bangladesh, India, Pakistan) make banks
vulnerable to financial stress and weigh on newlending. In addition, excess capacity in India has
led to sizable losses by corporations, heightening
loss provisions by banks, and limiting credit expansion for consumption and investment. In
Pakistan, sovereign guarantees associated with
the CPEC project elevate fiscal risks over the
medium-term. Finally, upcoming general elections in 2018 (Pakistan) and 2019 (India) could
lead to expansionary fiscal policy and widening
fiscal deficits.

B. Credit growth

Percent of total loans
20
2015

Percent
6
5
4
3
2
1
0

10
5

C. Emerging Market Bond Index
spreads

D. Short-term external debt
Percent of total external debt

25

5

0

0

Bangladesh

India

Sri Lanka

Sources: Bloomberg, Haver Analytics, World Bank.
A. Last observations are 2015.
B. e refers to estimated value.
C. Last observations are December 2016.

Security and geopolitical tensions in the region
could derail growing regional integration,
including in the apparel sector (Lopez-Acevedo,
Medvedev, and Palmade 2016). Terrorist andmilitant attacks (Afghanistan, Bangladesh,Pakistan), political unrest (Bangladesh, Maldives,
Nepal), and border disputes (India-Pakistan)presents risks to the region. If these intensify, risk
premiums and financing costs could rise sharply.
Furthermore, increased spending on security could
exacerbate fiscal vulnerabilities.
Although South Asia is less integrated globallythan other EMDE regions, external risks could
arise from weaker growth in key export markets—
the United States, the United Kingdom, European
Union, Russia, and the GCC countries (WorldBank 2016e; Figure 2.5.8). Moreover, an
unexpected tightening of financing conditions

2015

10

5
2013

15

10

2015

20

15

2015

20

2013

2016

2015

2014

2013

600
400
200
0

Percent of GDP

Reserve (RHS)

25

2013

Pakistan

2015

Sri Lanka

2013

Index
1600
1400
1200
1000
800

Bangladesh

Pakistan

Sri Lanka

India

Bangladesh

Afghanistan

Bhutan0

2016ePakistan

15

2015

India

Max 2010-2014

Sri Lanka

A. Non-performing loans

2012

Uncertainty about fiscal consolidation could
weigh on confidence in the near-term. Increases
in public sector salaries (Bangladesh, India), andother slippages in fiscal consolidation (Sri Lanka),
cast doubt on commitment to reduce public debt
growth to more sustainable levels. Furthermore,a sudden rebound in energy prices could
contribute to a reintroduction or an increase in
expenditures on subsidies, raising fiscal deficits.
Impaired commercial banks’ balance sheet,especially of state-owned banks (Bangladesh,
India, Pakistan), would contribute to fiscal strain
should recapitalization by the government become
necessary.

Increased provisions for non-performing loans highlight risks to financial
stability, credit growth, and investment. In India, credit to corporates
declined in 2016, reflecting distressed bank assets. Bond spreads for
Pakistan and Sri Lanka narrowed in 2016, due to improvements in theinvestment climate. Elevated short-term external debt in Bangladesh and
Sri Lanka, relative to their reserves, is a source of concern.

2011

In India, cash accounts for more than 80 percentof the number of transactions. In the short-term,‘demonetization’ could continue to disrupt
business and household economic activities,
weighing on growth (Rogoff 2016). Further, thechallenges encountered in phasing out large
currency notes and replacing them with new ones
may pose risks to the pace of other economic
reforms (e.g., Goods and Services Tax, labor, andland reforms). Spillovers from India to Nepal andBhutan, through trade and remittances channels,
could also negatively impact growth to theseneighboring smaller economies.

FIGURE 2.5.6 Vulnerabilities

2010

Pakistan) (Figure 2.5.6). External risks aremoderate, given South Asia’s limited global
integration. They include heightened policy
uncertainty in the United States and Euro Area,
unexpected tightening of financing conditions, ajump in energy prices, and a prolonged slowdown
in key export markets (Figure 2.5.7).

153

SOUTH ASIA

Pakistan

154

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.5.7 Risks of uncertainty in major advanced
economies
Compared to other EMDE regions, SAR is less integrated in the global
economy, constrained by poor business environment that weighs oncompetitiveness and investor sentiment. Some countries have trade(Bangladesh India, Pakistan, Sri Lanka) and finance (India) exposure toadvanced economies, and most of them have remittances inflow exposure
to the GCC economies. A prolonged period of heightened uncertainty inadvanced economies would have adverse impact on investment in
EMDEs.
A. Share of major economies in world
economy, 2010-15

B. Trade and financial exposures tomajor advanced economies, 2015

Percent of total
US
100

Percent of total
US
China
100

China

EU

Japan

Other

80

EU

Japan

Policy challenges

Other

80

60
40

60

20

40

0
GDP GDP Trade Foreign Stock(market (PPP)
claims market
exchange
capitalization
rates)

20
0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

C. Largest trade and financial
exposures to major advanced
economies, 2015

D. Impact of 10 point increase in VIX
on EMDE investment growth

Percent of GDP
12
European Union
10
8
6
4
2
0

Percentage points
United States

0.0

Bangladesh
Sri Lanka
India
Pakistan
Maldives

India
Maldives
Pakistan
Sri Lanka
Bangladesh

Nepal
Sri Lanka
Pakistan
Bangladesh
India

-1.0

FDI

Remittances

-1.5
-2.0
1

2

South Asia has been a success story in recent years,
with high growth, and considerable progressin poverty reduction (Romer 2016). The key
challenge is to sustain that success in the faceof future headwinds. Removal of structuralbarriers to growth, pursuit of greater international
integration, improved productivity, and further
fiscal and financial reforms are imperative(Figure 2.5.9).
Fiscal risks-0.5

Exportsraise inflation above targets and de-anchor
inflation expectations. This would compel central
banks to tighten monetary policy, which would
reducecreditgrowthandinvestment.
Furthermore, an uptick in energy prices could
raise the energy import bill, exacerbating current
account deficits. An increase in energy costs could
also lead to reintroduction of subsidies, withdetrimental consequences for fiscal deficits.

3

4
5
Quarter678Sources: World Bank, International Monetary Fund, Haver Analytics.
A. Trade (A) includes both exports and imports. Exports (B) include goods exports only. Foreign
claims refer to total claims of BIS-reporting banks on foreign banks and nonbanks. Stock market
capitalization is the market value of all publicly-traded shares. “FDI data (C) only available to 2014.
D. Cumulative responses of EMDE investment to a 10 percent increase in the VIX. Solid lines
indicate the median responses and the dotted lines indicate 16-84 percent confidence intervals.
Vector autoregressions are estimated for the sample for 1998Q1-2016Q2. The model includes, in thisorder, the VIX, MSCI Emerging Markets Index (MXEM), J.P.Morgan Emerging Markets Bond Index(EMBIG), aggregate real output and investment growth in 18 EMDEs with G7 real GDP growth, U.S.
10-year bond yields, and MSCI World Index as exogenous regressors and estimated with two lags.

amid further normalization of monetary policy in
the United States could exert upward pressure
on financing costs (Gertler and Karadi 2015) andlead to currency depreciation (Arteta et al. 2015;
Clark et al. 2016). Besides impacting inflation,
currency pressures could make short-term debt
rollover expensive (Patra et al. 2016; Chow 2015;
Davis 2015).
As a net energy-importing region, continued low
energy prices have provided support to disposable
incomes and domestic demand (World Bank
2016t). A sudden increase in energy prices could

Continued fiscal consolidation and an accelerationof SOE reforms is a priority to help ease budgetarypressures, to contain rising debt levels, and to lift
investor confidence. A transparent medium-term
framework for the budget would help build fiscal
buffers (India, Pakistan) and stabilize public debt
(Nepal, Sri Lanka). Improved public financial
management and efficiency at national andsubnational levels (e.g., through fiscal rules),would help to anchor expectations of fiscal
sustainability. Revenue ratios in the region are low
by comparison with other EMDE regions (WorldBank 2016a). In addition, to meet fiscal targets
without substantially reducing public investment
needs, better revenue collection is important. Thiscan be achieved through streamlining direct andindirect taxes (Bangladesh, Sri Lanka), by
expanding the tax base (India, Pakistan, Sri
Lanka),
furtherrationalizing
subsidies(Bangladesh, India, Pakistan), and by improving
the efficiency of tax collection (Bangladesh, Sri
Lanka). Reforming and privatizing SOE could also
lessen strains on the budget and reduce fiscal risks(e.g., rising contingent liabilities in state-ownedbanks in India). Revenue-led fiscal consolidationneeds to take into consideration its impact onpoverty and inequality.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Financial sector risks
In view of concerns about impaired bank asset
quality in the region, it is necessary to enhancefinancial sector stability and to minimize
spillovers to the rest of the economy from possiblebanking sector stress (Claessens 2015). Reforms
in corporate governance are important; to reduceleverage and to improve the quality of banklending. Banking sector reforms can improve theefficiency in allocation of credit (Bangladesh, India), and help to curtail excessive credit
growth (Sri Lanka). Appropriate reforms include
strengthening supervision and raising capitalrequirements. In India, a network of 27 listed
public sector banks account for almost threequarters of the banking system by assets.
Increasing competition in the banking sector
could improve corporate governance and reduce
non-performing
loans.
In
somecases,
consolidation of commercial banks is warranted(Hariyama, Montgomery, and Takahashi 2014).
Capital market development would allow firms
to use debt instruments (bonds), thereby easing
reliance on borrowing from banks but could
increase vulnerabilities to external shocks(World Bank 2016v; Sophastienphong, Mu, andSaporito 2008).
Structural reforms
Structural reforms to raise potential growth andincrease productivity are a priority. This can beaccomplished through global value chain
integration, investments in human capital,
improved labor markets, and greater labor force
participation by female, and in the formal sector.
Measures to counter high youth unemployment in
the region would have a large pay-off over time
(Dabla-Norris, Ho, and Kyobe 2016).
Integration in global value chains has been
associated with higher growth in other regions(Farole and Pathikonda 2016). South Asia is oneof the least internationally integrated regions. Poor
infrastructure connectivity and a weak businessenvironment weigh on competitiveness. Reducing
infrastructure gaps and an improving businessclimate would allow new productive sectors
to develop, generate jobs, and foster theirintegration into global value chains (Lopez‐

155

SOUTH ASIA

FIGURE 2.5.8 Spillovers from the United States and theEuro Area
A slowdown in U.S. or Euro Area output growth would reduce output
growth in EMDEs considerably. EMDE investment would respond morestrongly, possibly reflecting investor concerns about long-term growthprospects.
A. Output growth: Impact of 1
percentage point slowdown in U.S.
output growth on EMDEs

B. Output growth: Impact of 1
percentage point slowdown in EuroArea output growth on EMDEs

Percentage points
0.0

Percentage points
0.5
0.0

-0.5

-0.5

-1.0

-1.0
-1.5

-1.5

-2.0

-2.0

-2.5
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678C. Investment growth: Impact of 1
percentage point slowdown in U.S.
output growth on EMDEs

D. Investment growth: Impact of 1
percentage point slowdown in EuroArea output growth on EMDEs

Percentage points
1

Percentage points
1

0

0

-1

-1
-2

-2

-3

-3

-4

-4

-5

-5

-6
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678Sources: Haver Analytics, International Monetary Fund, World Bank.
Notes: Cumulative impulse response of weighted average EMDEs output growth (A.B.) or investment
growth (C.D.) at 1-8 quarter horizons to a 1 percentage point decline in growth in real GDP in the
United States (A.C.) and Euro Area (B.D.). Growth spillovers based on a Bayesian vector
autoregression of world GDP (excluding the source country of spillovers), output growth in the source
country of the shock, the U.S. 10-year sovereign bond yield pulse JP Morgan’s EMBI index,
investment (C.D.) or output (A.B.) in EMDEs, excluding, China and oil price as an exogenous
variable. Solid lines indicate the median responses and the dotted lines indicate 16-84 percent
confidence intervals.

Acevedo and Robertson 2016). Improved global
and intra-regional integration could further
encourage the developments of South Asian
supply chains, and broaden export opportunities.
South Asian economies should be able to leverage
their low-cost, labor-intensive, manufacturingsectors to this end.
Investment in human capital will help
raise potential growth and productivity as theregion shifts from basic manufacturing tomore innovative, knowledge-based industries(Aturupane et al. 2014). Improvements inthe formal education system and other training
programs will be needed to prepare workers forjobs in the modern manufacturing and services

156

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.5.9 Policy challenges
Further structural reforms to improve the business environment and labor market efficiency are imperative to attract investment and create
jobs. This will contribute to a continuation of the poverty reduction experienced over the past decade.

Sri Lanka

Pakistan2012 or latest

Nepal

Maldives

2000 or earliest

India

Percent
70
60
50
40
30
20
10
0

BhutanPakistan

2015-16

Sri Lanka

Bangladesh

Nepal

Enforcing
Contracts

2014-15

Percentile among ranked countries
35
30
25
20
15
10
5
0

India

Sri Lanka
EMDE

Resolving
Insolvency

Pakistan
Afghanistan

Trading AcrossBorders

Getting
Electricity

Starting a
Business

Dealing with
Construction
Permits

India
Bangladesh

Paying Taxes

Distance to Frontier score
100
90
80
70
60
50
40
30
20
10
0

C. Extreme poverty

B. Labor market efficiency

Bangladesh

A. Doing Business, 2016

Sources: Haver Analytics; World Development Indicator, World Bank.
A. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier.
B. Higher score means more efficient.
C. Extreme poverty is calculated by the rule: Poverty headcount ratio at $1.90 a day (2011 PPP) (percent of population).

industries (Romer 2016). While access to basic
education is generally adequate, quality is aconcern and access to higher levels of education
remain low compared to the East Asia and Pacificregion (UNESCO 2014). Greater workplacebased and vocational training can help build
skills that are relevant in changing economies.
Lifting labor market barriers are needed to increase
the mobility and flexibility of workforce (Shirke
and Srija 2014). Reforms should create newopportunities for female workers to participate in
the labor force, introduce greater flexibility inlabor markets and reduce taxes on low-paid
workers. Easing entry restrictions in the productand services markets (India, Pakistan) and easing
regulatory burdens (Bangladesh, India, Pakistan)would encourage investment and growth in export-led sectors (Alfaro and Chari 2014).
Regulatory reforms to promote household
enterprises in retail and wholesale trades(Bangladesh, Pakistan) can unlock the potential ofsmall- and medium-size enterprises (Abeberese
2016; Pachouri and Sharma 2016). Appropriate
reforms would reduce the number of permits (andthe associated delays) required to start and operatea business. For example, compared to an averageof 103 days in EMDEs, connecting to electricity
can take 429 days in Bangladesh and 181 days inPakistan (World Bank 2016w). In addition, lower
collateral requirements would improve access tofinance and decrease the cost of credit for small
businesses (Loayza 2016). Under the rightconditions, small and medium-sized firms can be
major creators of jobs.
Over two-thirds of the population in South Asia
resides in rural areas (World Bank 2016u). Almost
70 percent of India’s population live in villages,
and 75 percent of this population constitute themajority of the extreme poor (Tewari 2015).
Reforms to raise agricultural productivity, andthereby rural incomes, therefore, have a major roleto play in poverty alleviation (Maitra et al. 2016).
Increased access to irrigation, use of high-yield
varieties, and improved market access could boost
productivity. Encouraging diversification throughlabor-intensive agri-business activities such as foodprocessing, and fostering greater value added
agricultural
production will
createjob
opportunities, and lessen incentive to move toalready densely-populated cities.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017157

SOUTH ASIA

TABLE 2.5.1 South Asia forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates
EMDE South Asia, GDPa, b

6.7

6.8

6.8

2018

2019

2015

7.3

2017

2018

(percentage point difference

Projections
7.1

2016

from June 2016 projections)
7.4

-0.2

-0.3

-0.1

0.0

c

(Average including countries with full national accounts and balance of payments data only)
EMDE South Asia, GDPc

6.7

6.9

6.8

7.1

7.4

7.4

-0.2

-0.4

-0.2

0.1

GDP per capita (U.S. dollars)

5.3

5.5

5.4

5.7

6.0

6.1

-0.2

-0.4

-0.2

0.0

PPP GDP

6.7

6.8

6.8

7.1

7.4

7.4

-0.3

-0.3

-0.1

0.1

Private consumption

6.2

6.4

6.4

6.7

7.2

7.4

0.4

-0.3

-0.1

0.7

Public consumption

8.9

2.2

7.0

7.2

7.5

7.6

-7.4

0.4

0.7

0.9

Fixed investment

2.7

6.2

6.5

7.4

7.4

7.3

-1.0

-0.6

-0.7

-1.4

Exports, GNFSd

5.5

-4.9

2.2

5.6

7.1

7.4

-2.0

-0.5

-0.3

-0.4

d

1.0

-1.6

1.6

5.1

6.6

6.9

0.2

0.0

0.1

0.3

1.0

-0.7

0.1

-0.1

-0.2

-0.2

-0.5

0.0

0.0

-0.2

14/15

15/16

16/17

17/18

18/19

19/20

15/16

16/17

17/18

18/19

5.4

5.3

5.3

5.5

5.7

5.8

0.0

0.0

0.0

0.3

7.2

7.6

7.0

7.6

7.8

7.8

0.0

-0.6

-0.1

0.1

Imports, GNFS

Net exports, contribution to growthMemo items: GDPb
South Asia excluding India
India
Pakistan (factor cost)

4.0

4.7

5.2

5.5

5.8

5.8

0.5

0.7

0.7

0.7

Bangladesh

6.6

7.1

6.8

6.5

6.7

7.0

0.6

0.5

-0.3

0.7

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from
July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. 2017 data for Bangladesh, India, and Pakistan cover
FY2016/17.
c. Sub-region aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components.
d. Exports and imports of goods and non-factor services (GNFS).
For additional information, please see www.worldbank.org/gep.

158

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.5.2 South Asia country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015

2016

2017

2018

(percentage point difference
from June 2016 projections)

ProjectionsaCalendar year basis
Afghanistan

1.3

0.8

1.2

1.8

3.0

3.6

-0.7

-0.7

-1.1

-0.6
3.7

Bhutan

5.7

6.5

7.4

9.9

11.7

11.7

-0.2

0.6

1.9

Maldives

6.5

1.9

3.5

3.9

4.6

4.6

0.0

0.0

0.0

0.0

Sri Lanka

4.9

4.8

4.8

5.0

5.1

5.1

0.0

-0.5

-0.3

-0.2

Fiscal year basisa

14/15

15/16

16/17

17/18

18/19

19/20

15/16

16/17

17/18

18/19

Bangladesh

6.6

7.1

6.8

6.5

6.7

7.0

0.6

0.5

-0.3

0.7

India

7.2

7.6

7.0

7.6

7.8

7.8

0.0

-0.6

-0.1

0.1

Nepal

2.7

0.6

5.0

4.8

4.7

4.7

0.0

0.3

0.4

0.3

Pakistan (factor cost)

4.0

4.7

5.2

5.5

5.8

5.8

0.5

0.7

0.7

0.7

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. Historical data is reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan,
Bhutan, Maldives, and Sri Lanka, which report in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal,
and April 1 through March 31 in India. 2017 fiscal year data, as reported in the table for India, Pakistan, Bangladesh, Nepal, cover FY2016/17.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SOUTH ASIA

BOX 2.5.1 Recent investment slowdown: South Asia
Investment growth slowed from 11 percent in 2011 to 6 percent in 2015, and is expected to weaken further in 2016. Whilesubsiding political tensions and sharply lower oil prices have supported investment, long-standing structural bottlenecks continue
to pose an obstacle to investment growth. Sizable investment needs remain in transport and energy, as well as in human resources,
especially health and education.
South Asia (SAR) accounted for 4 percent of global
investment, on average, over 2010-15. Despite an uptick
in public investment spending, a deceleration in the private
sector resulted in a substantial decline in overall investment
growth, from 11 percent in 2011 to 3 percent in 2014. A
rebound, to 6 percent in 2015, still left the growth rate
below the long-term (1990-2008) average of 8 percent.
This box discusses the following questions:•

How has investment growth in the region evolved?

•

What were the main sources of the investment
slowdown?

•

What are the remaining investment needs?

•

Which policies can help address investment needs?

Recent investment weakness in South Asia reflects thelegacy of weak output growth during 2010-13, excess
manufacturing capacity in the face of sluggish external
demand, and some uncertainty about government policy.
These factors have compounded the long-term problems ofstructural bottlenecks, weak banking systems, and bouts ofpolitical tension. Needs for capital formation remain
sizable, especially in the energy and transport sectors; theregion also lags in the provision of health and education
services. Governments can help directly, and byencouraging private sector participation. More broadly,
improvements to the general business environment (e.g.,through more streamlined regulations and reduced
corruption) would enhance incentives for productive
investment.
How has investment growth in the region evolved?
Weak investment has been a drag on South Asia’s recent,consumption-driven expansion (World Bank 2016u).
Across the region, investment growth slowed sharply from
11 percent in 2011 to 3 percent in 2014, with only amodest rebound to 6 percent in 2015—barely half its
2011 pace and well below the long-term (1990-2008)
average of 8 percent (Figure 2.5.1.1). The downward trend
Note: This box was prepared by Boaz Nandwa.

reflects a slackening in India, (which accounts for morethan three-quarters of the region’s total investment),
offsetting a pickup in Bhutan, Nepal, and Pakistan.
Preliminary data suggests continued investment weakness
in 2016.
In India, gross fixed capital formation has been on a
downward trend since 2011, with a shift in thecomposition from private to public. While public
investment rose by 21 percent in FY2016, private
investment (which accounts for two-thirds of the total)
contracted by 1.4 percent, reducing overall investment
growth to 4 percent. Infrastructure demand is expected to
go up to $1 trillion under the 12th Five-Year Plan (20122017). Going forward, public and private investment
should be supported by higher allocations in the FY2017
federal government budget to build and upgrade
infrastructure, and the setup of a $3 billion National
Investment and Infrastructure Fund.
In Pakistan, investment surged in 2015, mainly reflecting
the China-Pakistan Economic Partnership (CPEC)
infrastructure project (worth $45 billion). This has morethan compensated for sluggishness in private investment.
The project is part of China’s “One Belt, One Road”
initiative, and consists of a network of highways, railways,
and pipelines to connect Western China to the Arabian
Sea through the Gwadar Port in Pakistan. The Islamic
Republic of Iran expressed interest in early 2016 to join the
CPEC project. Combined with the ongoing gas pipeline
project from the Islamic Republic of Iran, Pakistan shouldbe able to maintain robust public investment growth in thenear-term, while private investment is expected to pickup
in the medium-term.
In Bangladesh, capital formation is estimated to remain
weak in 2016, partly as a result of heightened politicaltensions and security concerns. Sri Lanka’s investment
contracted by 2 percent in 2016, following the suspensionof the $1.4 billion Colombo Port City real estate projectfor over one year in 2015. In the near-term, investment
growth in Sri Lanka is expected to continue on a
downward trend, following the tightening of monetary
policy in mid-2016 that raised financing costs. Fiscal
consolidation, aimed at reducing the fiscal deficit to 3.5
percent of GDP by 2020 under the IMF’s $1.5 billion

159

160

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.5.1 Recent investment slowdown: South Asia (continued)
FIGURE 2.5.1.1 Investment growth slowdown in South Asia
Investment growth has been below the long-term average in more than half of SAR economies since 2012. Its composition has
shifted away from private sector-driven investment growth during 2013-14 towards public sector-driven investment growth in2015. While lower oil prices and easing political tensions supported investment, weak activity during 2010-12 and longstanding structural bottlenecks constrained investment.

Percent
Below long-term average
100

Percentage points
10
8
6
4
2
0
-2
-4

SAR

SAR ex India

D. GDP growth
1991-2008 avg

Percent
12

2003-08 avg

SAR Excl. India

0
2010

EMDE

2011

2012

2013

2014

2015

2014

2013

2012

Private

2011

2014

2012

2010

2014

2012

2010

2014

25

2010

2010

50

2015

75

Public2014

Contracting

2013

2003-08 avg

C. Contribution to investment growth

2012

1990-2008 avg

2012

2010

Percent
14
12
10
8
6
4
2
0

B. Share of SAR countries with weak
investment growth

2011

A. Investment growth

India

2015

E. Terms of trade change

F. Political stability

Percent
8

Index, 0-100 (100=best)
66

6
8

62

4
2

4

58

0

SAR

SAR ex India

2014

2012

2010

2014

2012

2010

2014

2012

2010

0

54

-2
-4
2010

EMDE

2011

2012

2013

2014

2015

50
2010

2011

2012

2013

2014

2015

Sources: Haver Analytics, International Country Risk Guide (ICRG), Ministry of Finance of Sri Lanka, Reserve Bank of India, World Bank.
A. Weighted averages. Includes annual data for Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
B. Share of SAR economies with investment growth below its long-term average or with negative investment growth.
C. Weighted average for Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka.
D. GDP-weighted averages.
E. Investment-weighted averages. An increase denotes terms of trade improvements.
F. Investment-weighted averages of ICRG index of Political Risk. An increase denotes greater political stability.

Extended Fund Facility program,infrastructure spending (IMF 2016q).

will

weigh

on

What were the main sources of the investment
slowdown?
During 2010-13, weak economic activity weighed oninvestment and business confidence. Since 2014, however,investor sentiment in the region has benefited from sharply
lower oil prices, easing political tensions, and revived
reform agendas in India, Pakistan, and Sri Lanka, as well as
easing vulnerabilities in Bangladesh, India, and Pakistan.
This uptick has yet to translate into a robust rebound in
private investment. Structural bottlenecks (e.g., power
shortages, poor road and rail networks) and administrativerequirements constitute barriers to investment, and weakbanking sectors constrain investment finance.
India’s steep private investment slowdown has been
attributed to several factors (World Bank 2016u; Anandand Tulin 2014; Tokuoka 2012). First, the need tounwind excess capacity built during the pre-financial crisis
growth boom amid weak external demand (e.g., in the
manufacturing sector) has discouraged new projects andcaused investors to shelve existing projects. Second, policy
uncertainty has been a factor. For example, the stalled
Land Acquisition Bill has extended project development
timelines. Lack of federal and state government
coordination, on compensation for land acquisition andenvironmental clearances, has contributed to cost and time

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SOUTH ASIA

BOX 2.5.1 Recent investment slowdown: South Asia (continued)
overruns. Third, lenders have been less willing to financeoverleveraged corporates, especially in infrastructurerelated sectors (e.g., power and other utilities, steel, andcement firms). In particular, the Reserve Bank of India’s
2015 corporate governance reforms in state-owned banks(which represent two-thirds of the total banking sector
lending) has adversely affected lending to leveraged
corporates and conglomerates.
What are the remaining investment needs?
South Asia is the second most densely populated region in
the world, behind East Asia and Pacific, with large andpressing investment needs for infrastructure improvement(Bloom and Rosenberg 2011; Figure 2.5.1.2). Metrics ofhuman capital provision (e.g., expenditure on educationand healthcare, teacher-pupil ratios, doctor-patient ratios,water and sanitation in rural areas), fall below the EMDEs
average (World Bank 2016w). This suggests that sizable
additional outlays on human capital could effectively
alleviate poverty (Romer 2016; Estache and Garsous2012). Rapid urbanization and the maintenance of growth
momentum, call especially for improvement of energy andtransport infrastructure (Ellis and Roberts 2016; Inderst
2016; Battacharya 2012; ADB 2009, 2012; Andres, Biller,
and Dappe 2014).
South Asia is one of the least integrated regions in theworld (World Bank 2016e). This has been attributed toinadequacies in transport and power infrastructure (ADB2009). Coverage differs within countries and across theregion, with India and Pakistan somewhat better
positioned than other countries.
Energy shortages (electricity, diesel) remain a criticalconstraint to activity in the region. Underdeveloped within-country and cross-border electricity grid network
connectivity and, in some cases, geopolitical tensions havecontributed to significant energy shortfalls, compounding
regular electricity outages. In India, dependence on
imported fuels for power generation, and low electricity
tariffs have hampered power generation capacity, which
now requires significant expansion to meet energy
shortfalls (McKinsey 2011).
Bangladesh’s infrastructure quality lags behind othercountries in the region: power shortages and poortransport infrastructure have affected investment andproductivity (World Bank 2015t). The 7th Five Year Plan
estimates that about $410 billion in financing—twice thesize of 2015 GDP—is needed for developing Bangladesh’s
infrastructure. Investment is also needed in public healthcare, where expenditure has declined from 1.1 percent of

GDP in 2010 to 0.7 percent of GDP in 2014 (WorldBank 2015f, 2016t).
In Sri Lanka, fiscal consolidation, coupled with priority
spending to rebuild infrastructure after a 25-year civil war,
has crowded out expenditure for human capital-building
purposes. Government spending on education fell from
2.7 to 1.8 percent of GDP during 2006-2013, while
spending on health declined from 2.0 to 1.4 percent of
GDP over the same period (World Bank 2016x).
Which policies can help address infrastructureneeds?
The alleviation of some longstanding obstacles to growthwould help increase the level and productivity ofinvestment of all forms. A more targeted, multi-pronged,
policy strategy could also encourage investment by
increasing returns to investment, and by expanding thefinancing envelope (Henckel and Mckibbin, 2010; Nataraj
2007).
Private investment. Under the right conditions, public
investment can crowd-in private investment (WorldBank 2016u; Chapter 3).1 For example, private firms may
be able to reap the benefits of large scale, if public
infrastructure facilitates market access (Calderón,
Moral-Benitob, and Servéna 2010). However, in the
SAR, only India appears to have experienced a positive
crowding-in effect (Jesintha and Sathanapriya 2011;
World Bank 2006).
Financing. Financing for public and private investment
can be expanded in a number of ways to narrow theinvestment financing gap (Deutsche Bank 2016; Andres,
Biller, and Dappe 2014; McKinsey 2013; ADB 2012,2009). First, public-private partnership may offer
efficiency gains and cost-effectiveness (e.g., infrastructure
funds), and at the same time alleviate fiscal pressures(Anadon and Surana 2015; Nataraj 2007). This can help
reallocate government spending to socially desirable
projects that cannot, in practice, be undertaken by theprivate sector, for instance, because of an unduly low
private rate of return (e.g., water supply and sanitation
projects). Second, domestic savings can be mobilized by
improving access to the financial system (e.g., encouraging
pension funds) and by broadening and raising government
revenue collection. Third, banks’ lending capacities can beincreased by strengthening their balance sheets, and the

1Public investment could also lead to crowding-out of private investment, e.g. Pakistan (World Bank 2016s).

161

162

CHAPTER 2.5

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.5.1 Recent investment slowdown: South Asia (continued)
FIGURE 2.5.1.2 Investment needs in South Asia
Despite improvements since 2010, sizable investment needs remain in public infrastructure (energy, transport) and humancapital development.
A. Quality of infrastructure

B. Infrastructure investment needs
2010
2014
2010 EMDE average
2014 EMDE averageIndex, 1=low to 5=high3

Percent of GDP
12
10
8

2

6
4
1
2
0
0

EnergyIndia

Pakistan

Bangladesh

Transport

Telecom

Sri Lanka

Water,
Sanitation

OverallD. Selected education indicators

C. Selected health indicators
Per capita

Percent of population
120

5000

Percent of per capita
income, ratio
45

100

4000

80
3000

40
35

Range

AE

EMDEs

SAR

30
60

25

2000
40
1000

Range

AE

EMDE

SAR

20
15

20
10

0

0
Health expenditure
Improved(LHS)
sanitation (RHS)

Improved water
source (RHS)

50
Government expenditure

Pupil-teacher ratio

Sources: Battacharya (2012), Haver Analytics, Inderst (2016), World Bank.
B. This represents investment as a share of GDP required every year during 2010-2012 to meet investment needs. The authors use “bottom-up” approach based on
identified pipeline regional infrastructure projects across SAR.
C. Latest available data available during 2011-15. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita inpurchasing power parity terms, unweighted averages of 199 EMDEs, 34 AEs, and 6 SAR economies. Access to improved sanitation facilities (in percent of population),
unweighted averages for 150 EMDEs, 33 AEs, and 8 SAR economies. Access to improved water sources (in percent of population), unweighted averages for 148
EMDEs, 34 AEs, and 8 SAR economies.
D. Latest available data available during 2011-15. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary
student (in percent of per capita income), unweighted averages of 87 EMDEs, 32 AEs, and 5 SAR economies. Pupil-teacher ratio in primary education (headcount basis),unweighted averages for 165 EMDEs, 31 AEs, and 8 SAR economies.

efficiency of capital allocation may be improved byincreasing the commercial orientation of banks, including
through privatization and governance reforms. Fourth,
greater commercial orientation (through privatizations orconcessions to private investors) of state-owned enterprises

could raise efficiency and increase investment. Fifth,
reducing asset-liability mismatches through greater use offunding through capital markets (e.g., infrastructurebonds), can be an alternative to heavy reliance on banklending for infrastructure-related projects. Finally, foreignGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SOUTH ASIA

BOX 2.5.1 Recent investment slowdown: South Asia (continued)
direct investment in infrastructure can be encouraged byremoving regulatory obstacles to doing business in
restricted sectors (Kirkpatrick, Parker, and Zhang 2006;
World Bank 2000).
Reforms to foster an enabling environment. South Asia isjust ahead of Sub-Saharan Africa, but behind the otherregions in terms of a conducive business climate (WorldBank 2016p; Lopez‐Acevedo, Medvedev, and Palmade2016). Entry and administrative barriers in many sectors(construction,
finance,retailandwholesale,telecommunication, and health care) in Bangladesh, India,
and Pakistan have hampered investment in these sectors.
The burden of regulatory compliance, delays in utility
connections, difficulties in obtaining permits to start andoperate business, higher taxes, and rigid labor markets raise
the cost of doing business and discourage investment(Pachouri and Sharma 2016; Shirke and Srija 2014).
Compared to an average of 103 days in EMDE, obtaining
services from utilities (e.g., electricity) can take four time aslong in Bangladesh and almost twice as long in Pakistan(World Bank 2016p). In India, investors point to
restrictive labor laws as contributing to lower productivity
in the manufacturing sector, restricting employment
opportunities for women, and discouraging the adoptionof new technologies.
Reforms that promote competitiveness and reduce barriers
to trade can encourage investment in the tradable exportoriented sectors (e.g., services and manufacturing). Thiscan also level the playing field and increase profitability ofexporting, or of competing with imports in hitherto

protected industries (Alfaro and Chari 2014). Moregenerally, reforms to reduce regulatory burdens (e.g., landacquisition, environmental impact assessment) and tostrengthen public-private partnerships legislation (e.g.,consistent regulations, transparent bidding procedures) canfoster investment. Strengthening public investment
management processes, integrating infrastructure projects
in budget cycles, and curbing corruption in infrastructure
projects will not only improve quality of the infrastructure,
but also improve the efficiency of government spending(KPMG 2011; Ali 2009).
Stability. Policy and political uncertainty represents adeterrent to investment in parts of the region (Chapter 3).
Security challenges (Afghanistan, Pakistan) andgeopolitical tensions (India, Pakistan) remain a formidable
obstacle to creating a more conducive investment climate(Dash, Nafaraj, and Sahoo 2014) especially for crossborder projects that could increase regional economic
integration. Stalled reforms on land (acquisition,compensation, and environmental clearances) remain adrawback on infrastructure-related private investment.
Reforms to enhance efficiency of labor market—
encouraging greater female labor market participation,
facilitating hiring and redundancy procedures, andreducing taxes on low-paid workers—would increase themobility and flexibility of the work force (Shirke and Srija2014). In turn, the resulting increase in profitability, as
well as the improvement in household incomes, would
provide incentives for the expansion of businesses,
including small and medium-size enterprises.

163

Growth in Sub-Saharan Africa is estimated to have decelerated to 1.5 percent in 2016, the lowest level in overtwo decades, as commodity exporters adjust to low commodity prices. Regional GDP per capita contracted by
1.1 percent. South Africa and oil exporters account for most of the slowdown, while activity in non-resource
intensive countries—agricultural exporters and commodity importers—generally remained robust. Commodity
prices are expected to stabilize, but stay well below their levels of 2011, and fiscal adjustment needs remain
large. Growth in the region is forecast to rebound to 2.9 percent in 2017, and rise above 3.5 percent by 2018,as policies in oil exporters continue to adjust. Risks to the outlook are tilted to the downside. They include
heightened policy uncertainty in the United States and Europe, slower improvements in commodity prices, andtighter global financing conditions. Domestically, policy makers may not enact the reforms needed to rebuild
fiscal buffers. Addressing fiscal vulnerabilities, and bolstering per capita growth remain key policy challenges
across the region.

Recent developments
After falling to 3.1 percent in 2015, growth in Sub-Saharan Africa is estimated to have slowed
further, to 1.5 percent in 2016 (Table 2.6.1), its
worst performance since 1994. As a result,regional per capita GDP is estimated to havecontracted by 1.1 percent in 2016, following
growth of 0.4 percent in 2015. Low commodity
prices, weak external demand, drought, andsecurity problems continued to take a toll on
activity in the region. Crude oil prices averaged$43 per barrel in 2016, down 15 percent from2015. Metal prices rose, but were on average 11
percent lower than in 2015. Agricultural prices
remained weak. In addition to the terms of trade
deterioration, capital inflows fell. Compounding
these adverse external developments, several
countries were subject to negative domestic
shocks. El Niño-related drought caused sharp falls
in agricultural production in eastern and southernareas (Ethiopia, Lesotho, Malawi, Mozambique,Rwanda, South Africa, Uganda), and cutbacks inhydro-electricity generation (South Africa,
Note: This section was prepared by Gerard Kambou, with
contributions from Yirbehogre Some. Research assistance wasprovided by Xinghao Gong.

Zambia). The security situation deteriorated
notably in Nigeria, with militants’ attacks on oil
pipelines, and in South Sudan.
The weakness in activity was particularly marked
in South Africa and oil exporters, which accountfor two-thirds of regional output (Figure 2.6.1). In
South Africa, growth slowed to 0.4 percent in
2016, reflecting the effects of low commodity
prices and heightened governance concerns.
Growth among oil exporters fell sharply to -0.2
percent in 2016 from 2.9 percent in 2015, with
Angola and Nigeria, the region’s two largest oil
exporters, continuing to face severe economic andfinancial strains. In both countries, the low oil
price was compounded by a decline in oil
production—due to pipeline attacks in Nigeria,
and a fall in investment in Angola. Domestic
demand weakened as low commodity revenues
forced deep cuts in public spending. In Nigeria,salary arrears further constrained householdspending. Foreign exchange shortages, coupledwith intermittent power outages, weighed heavily
on the manufacturing sector. Reflecting the broad
weakness in its economy, Nigeria’s GDP
contracted by 1.7 percent in 2016. In Angola,
growth slowed to 0.4 percent. In Angola, Nigeria,
and South Africa, per capita growth was negative

166

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.6.1 Growth
GDP growth in Sub-Saharan Africa slowed from 3.1 in 2015 to an
estimated 1.5 percent in 2016, driven by low commodity prices anddomestic shocks. The slowdown was particularly marked in South Africa
and oil exporters; in contrast, growth in agricultural exporters andcommodity importers remained solid.

Tea

Cocoa

SSA ex. Nigeria and South Africa
EMDE ex. China
Sub-Saharan Africa

8
6
4
2
0

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-2

2005

Gold

Iron ore

Oil

CoffeePercent
10

Platinum

Cumulative percent change of nominal index,
June-Dec. 2014
2010=100
Dec. 2014-Dec. 201560
Dec. 2015-Nov. 2016
40
20
0
-20
-40
-60
-80

CopperB. GDP growth in Sub-Saharan Africa

Natural gas

A. Commodity prices

C. GDP growth in commodity
exporters and importers

D. Per capita GDP growth in Angola,
Nigeria, and South Africa

Percent
7
6
5
4
3
2
1
0
-1

Percent
4
2014
3
2
1
0
-1
-2
-3
-4
-5

SSA commodity
importers

SSA agriculture
exporters

SSA metal
exporters excl.
South Africa

SSA oilexporters

South Africa

Sub-SaharanAfrica

2015
2016
2017f

E. Quarterly GDP growth and Manufacturing PMI in Nigeria

Angola2016

Nigeria

4

54

2

52

0

50

South Africa Sub-SaharanAfricaPMI, 50+=expansion
Index, 2010=100
Manufacturing PMI (LHS)
56
Manufacturing production volume (RHS) 110
108

52

106
104

Oct-16

Jul-16

Apr-16100

Jan-16

2016

Q4

Oct-15

Q3

Jul-1540
46
Q2

Apr-15

Q1

Jan-15

2015

Q4

Jul-14Q3

Oct-14

Q2

Apr-14

Q1

102

48

Jan-14-4

Real growth (LHS)
Real non-oil growth (LHS)
PMI (RHS)

Growth in commodity importers was steady. A
rebound in Cabo Verde and steady growth in
Mauritius offset a slowdown in the Seychelles andSwaziland. Growth increased in Cabo Verde on
account of tourism, foreign investment, andimproved domestic demand. A slowdown inconstruction weighed on growth in the Seychelles.
Persistent electricity shortages and politicalinstability constrained activity in the Comoros.
Growth was low in Lesotho and negative in
Swaziland, reflecting the effects of drought andspillovers from a slowdown in South Africa.

48
44

-2

By contrast, many agricultural exporters—Côted’Ivoire and Senegal in West Africa, Ethiopia and
Rwanda in East Africa—continued to grow at apace of 6 percent or more (Table 2.6.2). Growthin these countries reflected strong public
infrastructure investment and buoyant private
consumption as they continued to benefit from
low oil prices. These trends were at play in the
CFA franc zone1, where growth has been resilient.
Among other agricultural exporters, growthslowed in Malawi and Uganda partly due todrought, and was weak in politically fragile
countries (Burundi, The Gambia).

2017f

F. South Africa: Manufacturing PMI
and Production

Composite PMI, 50+=expansion
56

Percent
62015

government debt led to a deterioration in investor
sentiment in Mozambique. Post-Ebola recovery in
Guinea, Liberia and Sierra Leone was hamperedby the low price for iron ore, their main export.

Sources: Haver Analytics, Nigeria National Bureau of Statistics, Statistics South Africa, World Bank.
B. EMDE = emerging market and developing economies. E.F. PMI = Purchasing Managers’ Index.
SSA = Sub-Saharan Africa.

in 2016. Other oil exporters were also severely
affected by low oil prices, with Chad falling into
recession. However, growth was robust in
Cameroon and the Republic of Congo, as public
investment and oil production remained high.
Other commodity exporters—particularly metals
exporters—struggled to adjust to low commodity
prices. Growth slowed appreciably in the
Democratic Republic of Congo and Mozambique.
The discovery of undisclosed information on

In countries where growth faltered, credit to theprivate sector slowed and employment fell.
Activity in financial institutions contracted andnon-performing loans rose. In South Africa, credit
to households contracted in real terms. Credit to
the corporate sector was more resilient, but below
its recent peaks. Credit to the private sector also
contracted in oil exporters such as Angola andNigeria, as well as among other commodity
exporterssuchasMozambique.
The
unemployment rate increased from 25 percent in2015 to 27 percent in 2016 in South Africa. In
Nigeria, the unemployment rate reached 13.9
1The CFA franc zone is an umbrella agreement between France
and two monetary unions: the Central African Economic andMonetary Community (CEMAC) and the West African Economicand Monetary Union (WAEMU). Both unions peg their currencies
to the euro at the same level.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Capital flows to the region declined. FDI fell
sharply, reflecting low commodity prices and, insome cases (Nigeria, Mozambique), weakening
investor confidence. Equity inflows also decreased.
The United Kingdom’s vote to leave the European
Union set off a bout of turbulence in South
Africa’s stock market. Cross-border bank lending
moderated due to weak trade growth. Sovereign
bond issuance slowed markedly, as weak investor
demand led potential borrowers (Angola, Nigeria)
to delay new issues. Only South Africa and Ghana
tapped the international bond market in 2016.
After a spike at the start of the year, sovereign
bond spreads in the region fell, reflecting reduced
financial market volatility. However, following the
U.S. elections, sovereign spreads rose notably,suggesting a tightening of financing conditions.
Remittance flows, an important source offinancing for many countries (Nigeria, Liberia,

A. Current account balance
Percent of GDP
0

2015

2016

B. Sovereign bond spreads
Basis points
1,500

2017f

1,300

-5

1,100

-10

900

-15

Sub-Saharan Africa
Emerging markets
Gabon
Ghana
NigeriaSouth Africa

700
500
300

C. Foreign direct investments

D. Capital flows

US$, billionsCount
FDI volume (LHS)
770
Number of investments (RHS)
660

US$, billions
60

50

40

4

40

30

3

30

20

2

20

10

1

10

0

0

0
2012

2013

2014

2015

2013

Dec-16

Jul-16

Feb-16

Sep-15Equity issue
Bond issue
Bank loans

50

5

2011

Apr-15Jun-14

Nov-14100

Jan-14

SSA commodity
importers

SSA agriculture
exporters-20
SSA metal
exporters

Current account deficits remained very high acrossmuch of the region in 2016 (Figure 2.6.2). In
South Africa, the current account deficit stayedwide, at more than 3.5 percent of GDP, on
account of a slowdown in export growth and anegative income balance. In oil exporters, thecurrent account deficit edged higher. However, ina number of countries, including Angola, Chad,
Equatorial Guinea and Nigeria, the growth
slowdown led to a fall in imports that more thanoffset the decline in oil exports. Among metals
exporters, the current account deficit remained
high (Mozambique, Namibia) or even widened(Niger, Zambia), despite contractions in imports.
In agricultural exporters, the current accountdeficit was stable as strong demand for capital
goods imports was offset by the gains from low oil
prices. Nonetheless, several countries (Malawi,
Rwanda, and Togo) saw their current accountdeficits widen, as the trade balance deteriorated
sharply. Current account deficits deteriorated
markedly among commodity importers, reflecting
a surge in capital goods imports in Cabo Verdeand the Comoros as investment spending
increased.

Current account deficits remain very high in most commodity exporters.
They are relatively low in commodity importers despite strong capital
goods imports. Sovereign bond spreads fell—in common with other
EMDEs—but rose following the U.S. elections. Capital inflows, particularly
FDI and bond issuances, decreased.

SSA oilexporters excl.
Nigeria

Current account deficits and financing

FIGURE 2.6.2 External developments

Sub-SaharanAfricapercent in the third quarter, up from 10.4 percent
in the fourth quarter of 2015.

167

SUB-SAHARAN AFRICA

2014

2016

2015

2016
Jan-Nov

Sources: Haver Analytics, JP Morgan, World Bank.
A. Aggregates exclude Liberia and Sierra Leone due to data unavailability. SSA = Sub-SaharanAfrica.
B. Last observation is December 15, 2016.

The Gambia, and the Comoros), declined as
growth in source countries remained subdued.
Exchange rates, foreign reserves andinflation
The high current account deficits and falling
capital inflows put pressure on exchange rates andreserves. Currencies in the region continued to
exhibit a wide divergence in performance (Figure
2.6.3). The South African rand rebounded in thesecond quarter of 2016 on the back of an increasein commodity prices, but began to fall again on
expectations of tightening U.S. monetary policy,
and as political uncertainty increased. The rand
strengthened in the fourth quarter, after S&P
Global Ratings affirmed South Africa’s investment
grade credit rating. The currencies of Angola andNigeria weakened substantially against the U.S.
dollar. The Nigerian naira fell by 40 percent after

168

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.6.3 Inflation and exchange rates
Regional inflation rose to double-digit levels in 2016. A common factor was
rising food prices due to drought. Currency depreciations were a factor ina number of large commodity exporters. While higher inflation often
triggered tighter monetary policy, real interest rates remain negative insome countries. Although most currencies depreciated in real effective
terms, inflation in commodity importers generally remained low.
A. Inflation

B. Nominal exchange rates

D. Real interest rates

Index, 2010=100
GhanaSouth Africa
Zambia120

Percent
10

Nigeria
UgandaSub-Saharan Africa

140

Dec-16

Jul-16

Jul-16Oct-16

Apr-16

Jan-16

Jul-15Oct-15

Apr-15Jan-15

Jul-14Oct-14Apr-14Jan-14

C. Real effective exchange rates

Feb-160-10

Sep-1510

Apr-1520

Nov-1430

LCU/US$, percent change since January 1, 2014
10
0
-10
-20
Angola
-30
Kenya
-40
Mozambique-50
NigeriaSouth Africa-60
Mauritius-70

Jun-1440

Sub-Saharan Africa
AngolaKenya
Mozambique
NigeriaSouth Africa
Mauritius

Jan-14Year-on-year, in percent
50

0
-10

AngolaZambiaNigeria

Oct-16

Jul-16

Apr-16

Jan-16Oct-15

Jul-15

Apr-15Jan-15Oct-14Jul-14Apr-14Jan-1440

LatestDec-14South Africa

-30

Kenya

-20

60

Ghana

80

Uganda100

Sources: Bloomberg, Haver Analytics, World Bank.
A. Last observation is November 2016.
B. Last observation is December 21, 2016.
C. Last observation is November 2016.
D. Real interest rates are calculated as policy interest rates minus year-on-year inflation. Latest
indicates November 2016 data.

the Central Bank of Nigeria abandoned the peg inJune 2016; and it continued to face downward
pressures, reflected in the large wedge between theofficial and parallel market rates. In othercommodity exporters, the Mozambican meticaldepreciated by more than 50 percent against the
U.S. dollar, on account of falling capital inflows.
Currency depreciation in real effective terms
has been relatively muted, partly reflecting a
recovery in commodity prices and a partial
adjustment of the exchange rate in some countries.
Among oil exporters in the CEMAC, thedepreciation in effective terms has been limited,
due to the peg to the euro (IMF 2016r). Pressureson exchange rates were partly met with reserve
drawdowns, especially among oil-exporters.
International reserves, in months of imports ofgoods and services, fell by more than 17 percent in
Angola and Nigeria. Reserves also declined inmetals exporters, including by over 30 percent inMozambique and Namibia, compared to 2015. Bycontrast, the currencies of agricultural exporters
and commodity importers were broadly stable.
Deep currency depreciations, coupled with risingfood prices due to drought, pushed inflation into
double digits (on average) in 2016. Headline
inflation accelerated to 41.1 percent (y/y) in
Angola, and was above 15 percent in Ghana,
Malawi, Mozambique, and Nigeria. Inflation
remained above the central bank target range inSouth Africa, at 6.6 percent (y/y). Higher foodcosts contributed to inflation in Malawi,
Mozambique, and South Africa. The surge ininflation weighed on private consumption, andforced central banks to tighten policy. However,in several commodity exporters (Angola, Nigeria),
real interest rates have remained negative,
suggesting that further policy tightening may benecessary to anchor inflation expectations, and torelieve pressure on their currencies. Meanwhile,currency stability helped keep inflation within thecentral bank target range in Kenya, Tanzania, andUganda. Inflation stayed low in CFA franc zone
countries, reflecting the peg to the Euro, andamong commodity importers owing to falling oil
prices. In these countries, interest rates were cut(Kenya, Mauritius, and Uganda), or kept low(WAEMU).2
Fiscal positions
Government finances remained under pressure
across the region in 2016 (Figure 2.6.4). Modest
improvements in oil and metals exporters wereoffset by widening fiscal deficits in agricultural
exporters and commodity importers. In South
Africa, weaker-than-expected revenues andadditional expenditure demands resulted in higher
budget deficits than projected. The fiscal deficitrose in Nigeria; deficits in other oil exporters eased
but stayed high. In many of these countries, thefiscal consolidation efforts that began in 2015
slowed in 2016. Expenditures rose in Cameroon
and remained broadly unchanged in Gabon.
Fiscal consolidation did, however, help to reduce
the fiscal deficit in commodity exporters, such as

2WAEMU countries are: Benin, Burkina Faso, Côte d’Ivoire,
Guinea Bissau, Mali, Niger, Senegal and Togo.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

OutlookReal GDP in Sub-Saharan Africa is forecast to
grow by 2.9 percent in 2017, barely above
population growth, and by 3.6 percent in 2018
(Figure 2.6.5). The recovery is moderate because
the region continues to adjust to lower commodity

Fiscal deficits generally remained at elevated levels in 2016. While oil andmetals exporters made modest improvements, agricultural exporters andcommodity importers saw a deterioration, reflecting strong infrastructure
spending and other expenditures. As a result, government debt continued
to rise in the region as a whole, with particularly large increases in Angola,
and Mozambique.
A. Fiscal balances

B. Fiscal balances in selected
countries

C. Public debt

Mauritius

2016

ZambiaSouth Africa

Nigeria

Mozambique

Kenya

2015

Sources: International Monetary Fund, World Bank.
A.C. Simple average of fiscal balance and public debt.

prices. Although rising through the medium term,commodity prices will remain well below theirpost-global-crisis averages. Growth rates willcontinue to vary widely across the region, withgrowth in South Africa and oil exporters weaker
than in metals exporters, and growth in nonintensive resource countries remaining robust.
Private consumption growth in South Africa andoil exporters is expected to improve only
gradually. In South Africa, inflationary pressuresand high unemployment will weigh on consumer
spending. In Nigeria, ongoing exchange rateadjustment,
coupledwith
thegradualimprovement in oil prices, will provide a modest
boost to domestic revenues. This, in turn, should
help the federal and state governments meet someof their financial obligations, including theclearance of salary arrears. Meanwhile, stablecurrencies, lower inflation, and improved
agricultural production should support robust

2016

Mauritius

SSA commodity
importers

SSA agriculture
exporters

SSA metal
exporters0

2015

Zambia20

2014South Africa

40

Percent of GDP
120
100
80
60
40
20
0

Nigeria2016

Mozambique

2015

Kenya

2014

60

SSA oilexporters excl.
Nigeria

2014

D. Public debt in selected countries

AngolaPercent of GDP
80

Percent of GDP
0
-2
-4
-6
-8
-10
-12

Angola2016

SSA commodity
importers

2015

SSA agriculture
exporters

2014

SSA metal
exporters

SSA oilexporters excl.
Nigeria

Percent of GDP
0
-2
-4
-6
-8
-10
Sub-SaharanAfricaThere are wide variations across countries in thelevel and growth of government debt. In South
Africa, gross government debt continued to rise,
exceeding 50 percent of GDP. Excluding Nigeria,
where debt ratios are still low, government debt
in oil exporters stabilized in 2016. In this group,
the largest rise in government debt relative to
GDP was in Angola, reflecting the slower pace offiscal adjustment. Among metals exporters, thegovernment debt/GDP ratio jumped to over
110 percent in Mozambique, reflecting larger
government guarantees on state-owned-enterprisedebt. Angola and Mozambique saw their sovereign
credit ratings cut on concerns about debt
sustainability. By contrast, in Ghana, government
debt declined, owing to its fiscal consolidation
efforts. Among agricultural exporters, government
debt rose in Ethiopia, due to borrowing to finance
an ambitious infrastructure program, and in somefragile countries (Burundi, The Gambia). The
latter continued to resort to central bank advances
and the issuance of treasury bills to financepersistently high fiscal deficits. Among commodity
importers, government debt remained high in
Cabo Verde at 119 percent of GDP, constraining fiscal options. Partly due to theappreciation in the U.S. dollar, high debt levels
indicate greater debt risks.

FIGURE 2.6.4 Fiscal developments

Sub-SaharanAfricaGhana, where the government is implementing an
economic
stabilization
program.
Amongagricultural exporters, deficits remained high
(Kenya, Togo), or widened (Ethiopia, Uganda) as
robust growth encouraged higher expenditures.
Fiscal balances improved in some countries(Benin, Senegal), helped by a slowdown ingovernment spending. In commodity importers,
the fiscal deficit deteriorated in Lesotho on
account of a decline in Southern African Customs
Union transfers. The Seychelles’ fiscal surplus
narrowed significantly, despite an increase inrevenue, as recurrent spending accelerated.

169

SUB-SAHARAN AFRICA

170

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 2.6.5 Outlook for economic growth
Regional GDP growth is expected to pick up modestly to 2.9 percent in2017 and 3.6 percent in 2018. The recovery in South Africa and commodity
exporters will be constrained by continued adjustment to lower commodity
prices. In contrast, growth in non-resource intensive countries is expected
to remain robust, driven in part by public infrastructure investment.
B. Growth forecast

US$ nominal, 2010=100130EnergyMetals110
Agriculture

Percent
9
8
7
6
5
4
3
2
1
0

D. Government expenditures

Percent
7
6
5
4
3
2
1
0
-1

Percent of GDP
36
34 SSA commodity importers
SSA oil exporters
32 Sub-Saharan Africa
30 SSA metal exporters
28 SSA agriculture exporters

2018

26
24
22

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

20

2007

SSA commodity
importers

SSA agriculture
exporters

SSA metal
exporters excl.
South Africa

SSA oil exporters

2015
2016
2017f
2018f

South Africa

Sub-SaharanAfricaC. Growth forecast breakdown

2016

2014

2012

2010

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

10

2008

30

2006

50

2004

70

SSA
SSA ex. Nigeria and South Africa

2002

90

2000

A. Commodity price forecasts

Source: World Bank.
Notes: Non-resource intensive countries include agricultural exporters and commodity importers. The
shaded area represents forecasts.

consumer spending in agricultural exporters andcommodity importers.
Investment growth is expected to remain subdued(Box 2.6.1, Chapter 3). The move toward looser
monetary policy in some advanced economies
and improvements in commodity prices havehelped bolster the trade-weighted exchange valueof the South African rand. This has tempered
import price pressures in South Africa, and led theReserve Bank to hold interest rates steady.
Meanwhile, investments in electricity generation
capacity have reduced power outages. However,policy uncertainty and low business confidence
continue to weigh on activity. In Nigeria, thegradual stabilization of oil prices and an increasein oil production will help support a modest
recovery. Policy reforms are helping to improvethe environment for private investment.
Fuel shortages have eased following an increase in
prices. Policy tightening should help stabilize
the naira, and encourage a return of interna-

tional investment. In Angola, high inflation andtight policy will continue to weigh on domestic
demand.
In other mineral exporters, the outlook is broadly
favorable. In Ghana, improving fiscal and external
positions should help boost investor confidence.
Post-Ebola recovery is expected to continue inGuinea, Liberia, and Sierra Leone, as risingcommodity prices boost investment and exports.
In Mozambique, recent progress in developing thenascent energy sector will help boost investment ingas production.
In agricultural exporters (Côte d’Ivoire, Ethiopia,
Kenya, Rwanda, Senegal, and Tanzania), large
infrastructure development programs willcontinue to support robust growth. To financethese programs, their governments continue todraw on public-private partnerships (Côted’Ivoire, Rwanda), donor aid (Rwanda), andChinese entities (Ethiopia, Tanzania). However,political fragility will exert a drag on growth incountries such as Burundi and The Gambia.
Among commodity importers, Cabo Verde,
Mauritius, and the Seychelles are expected to
expand at a moderate pace, as heightened
uncertainty in Europe, their main export market,
weighs on tourism, investment, and trade flows.
Regional trade and infrastructure investment will
help support a gradual increase in growth inLesotho and Swaziland. Electricity shortages andweak investment will continue to affect growth in
the Comoros.
The outlook assumes that fiscal positions will
gradually improve, as commodity exporters
continue to adjust. In South Africa, the 2017/18
budget includes a mix of tax increases andspending curbs aimed at sustaining fiscal
consolidation. However, weak growth and adifficult political environment may slow its pace.
Nigeria’s shift to a more flexible exchange rate is
expected to boost government revenue, while thephasing out of fuel subsidies should help containcurrent
expenditures.
Nonetheless,thegovernment’s plans to ramp up public investment
to support the economy, if passed, will weigh on
fiscal balances. Similarly, election related-spending

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

will likely keep fiscal deficits elevated in various
countries (Angola, the Democratic Republic ofCongo, Kenya).
Weak net exports and terms of trade will continue
to exert a drag on the region. Demand fromadvanced economies is expected to remain
subdued, given their moderate prospects for
growth. Private consumption and infrastructure
investment spending will keep imports high incountries across the region. By 2019, however, thedrag on growth should ease gradually as
commodity prices rise, and import growth slows
on the back of maturing investment projects.

FIGURE 2.6.6 Risks of uncertainty in major advanced
economies
Downside risks to the baseline forecasts have increased since June,
reflecting heightened policy uncertainty in the United States and Europe,
two major trading partners for countries in the region. A confidence shockin major advanced economies could further dent regional investment
growth, which is already below the long-term average.

A. Relative size of major world
economies, 2010-15
Percentof total
100

US

China

EU

Japan

B. Trade and financial exposures tomajor advanced economies, 2010-15

Other

80

•

A sharper-than-expected slowdown in China
could weigh on demand for export
commodities and undermine their prices.
Slower-than-expected
improvementsincommodity prices would put more strain on
fiscal and current account balances, forcing
deeper expenditure cuts that could weaken therecovery and infrastructure investment that isvital for long-term growth.

On the domestic front, the main risk is that policy
makers might fail to adjust to an environment
with low commodity prices and weak global
demand. With commodity prices remaining low,
sustained measures are needed to contain fiscal

Japan

Other

80
60

40

40

0
GDP GDP Trade Foreign Stock(market (PPP)
claims market
exchange
capitalization
rates)

20
0
Exports

Inward Remittance Portfolio Foreign
FDI
inflows liabilities claims

C. Largest trade and financial
exposures to major advanced
economies, 2015

D. Impact of 10 percent increase in
VIX on EMDE investment growth

Percent of GDP
40
120

Percentage points
0.0

European Union

United States

52

30

-0.5

20
41

10

-1.0
Liberia
AngolaCabo Verde
Gabon
South Africa

Gambia, The
Liberia
Cabo Verde
SenegalComoros0

Liberia
Congo, Rep.
Chad
Cote d'Ivoire
Gabon

Heightened policy uncertainty in the UnitedStates and Europe could lead to volatility infinancial markets and higher borrowing costs,
or even trigger a cut-off in capital flows to
emerging and frontier markets. The
environment of low yields in advanced
economies has led to a surge of capital flows
into Sub-Saharan Africa in recent years. Thishas created vulnerabilities for the region, inthat a cut-off or reversal of such flows would
likely hit hard the more heavily tradedcurrencies, such as the South African rand.
Many smaller economies are already unable toaccess international debt markets.

EU

60

Risks

•

Percent of total
US
China

100

20

Risks to the outlook remain heavily tilted to thedownside (Figure 2.6.6). On the external front:

171

SUB-SAHARAN AFRICA

Exports

FDI

Remittances

-1.5
1

2

3

4
5
Quarter678Sources: Bank for International Settlements (BIS), Haver Analytics, International Monetary Fund,World Bank.
A.B. Trade (A) includes both exports and imports. Exports (B) includes goods exports only. Foreign
claims refer to total claims of BIS-reporting banks on foreign banks and nonbanks. Stock market
capitalization is the market value of all publicly-traded shares. “US” stands for United States; “EU”
stands for European Union. FDI data only available up to 2014.
C. Goods exports to the United States/Euro Area, remittances from the United States/Euro Area, and
FDI from the United States/Euro Area (all in percent of GDP). Chart shows only the countries with thelargest exposures to the United States and Euro Area.
D. Cumulative responses of EMDE investment to a 10 percent increase in the VIX. Solid lines
indicate the median response and the dotted lines indicate 16-84 percent confidence intervals. Vector
auto regressions are estimated with sample for 1998Q1-2016Q2. The model includes, in this order,
the VIX, MSCI Emerging Markets Index (MXEM), J.P.Morgan Emerging Markets Bond Index(EMBIG), aggregate real output and investment growth in 18 EMDEs with G7 real GDP growth, U.S.
10-year bond yields, and MSCI World Index as exogenous regressors and estimated with two lags.

deficits and rebuild buffers. In some countries,
however, political pressures may prompt the
adoption of haphazard populist policies, or lead toprotracted legal and political stress, hampering
fiscal adjustment. In others, a further deteriorationof security conditions could put additional strainson public finances. In the absence of sound,forward-looking budget management, high growthof borrowing requirements will pose major risks of
economic instability, and impair the long-run
welfare of the population.

172

CHAPTER 2.6

Policy challenges
The sustained decline in commodity prices has
dealt a major setback to the region, threatening
recent progress on poverty and revealing sizable
macroeconomic imbalances in some countries.
Regional per capita output contracted in 2016,
with growth and employment slowing sharply inthe large commodity exporters. A significant
number of Sub-Saharan Africa’s poor live incountries where per capita income growth was
negative in 2016. Unless growth is restored,
poverty rates will rise. This implies a dual
challenge: developing new sources of growth while
ensuring macroeconomic stability.
Improvements in agricultural sectors. About twothirds of the poor in the region live in rural
households, for which agriculture is the dominantsource of income and food security. Expansion ofsmallholder agricultural output growth is therefore
essential for balanced income growth (World Bank
2016y). For many countries in the region, raisingproductivity growth in smallholder agriculture,and making smallholder farmers competitive, arecentral to improving the lives of the people (deJanvry and Sadoulet 2012).
Although agricultural output growth in SubSaharan Africa has improved over the last two
decades, it has largely been the result of expanding
the area under cultivation rather than productivity
gains, which have remained limited. Unleashingproductivity improvements will require significant
public investments in rural public goods tostrengthen markets, and to develop anddisseminate improved technologies. While
progress has been made in these areas, investment
in agriculture R&D remains insufficient.
Governments will need international support tofinance these investments. To make smallholder
farmers more competitive, governments need totake steps to improve the business environment.
Attention is particularly needed on upgrading
power and trade logistics infrastructure,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

strengthening the skills base, and expanding
markets through deeper regional integration(World Bank 2013b).
Countries in the region will also need to attract
FDI to help develop agro-businesses with capitaland skills that can be integrated into global value
chains. Countries that have made the largest
strides into global value chains – Ethiopia, Kenya,
and South Africa – have benefitted from thisintegration (Allard et al. 2016).
Macroeconomic stability. Governments need torebuild their policy buffers. Adjustment to low
commodity revenues has started in somecountries; however, it has relied on measures suchas reserve drawdowns or deep cuts in capital
expenditures. More sustainable sources of revenue
are needed, including better tax collection. Tax
collection has been held back by limited data on
potential taxpayers, ineffective tracking tools, gaps
in capabilities and resources, and complex tax
processes. Appropriate measures to improve tax
collection vary across countries. Oil exporters,such as Angola and Nigeria, need to diversify theirtax sources, upgrade IT infrastructure, and ensurecompliance. For smaller economies, standardizing
and simplifying internal processes, and improving
collection procedures, will help boost revenues(McKinsey Global Institute 2016).
Fiscal adjustment through reduced and more
efficient government expenditure is also critical.
This implies rationalizing current expenditures,and improving the quality of public investment
through more effective financial management.
Within a credible medium-term framework,
expenditure should be maintained on healthand education, to promote learning and build
human capital (Romer 2016), and on investment
in strategic infrastructure (Box 2.6.1, Chapter 3).
Such a public expenditure program should form
part of a broader strategy to make the most of
the promising economic potential of the young
and growing population in the region (Bloom etal. 2016).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

173

SUB-SAHARAN AFRICATABLE 2.6.1 Sub-Saharan Africa forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates
EMDE SSA, GDP

a

4.7

3.1

1.5

2018

2019

3.6

2016

2017

2018

(percentage point difference

Projections
2.9

2015

from June 2016 projections)
3.7

0.1

-1.0

-1.0

-0.7

b

(Average including countries with full national accounts and balance of payments data only)b

EMDE SSA, GDP
GDP per capita (U.S. dollars)
PPP GDP
c

4.7

3.1

1.5

2.9

3.6

3.7

0.1

-1.0

-1.0

-0.7

1.9

0.4

-1.1

0.2

1.0

1.1

0.1

-1.0

-1.0

-0.7

5.0

3.3

1.7

3.1

3.9

4.0

0.1

-1.1

-1.1

-0.7

Private consumption

2.9

2.4

1.5

2.9

3.4

3.4

-0.4

-1.0

-0.7

-0.5

Public consumption

2.2

1.7

2.1

2.7

3.0

3.0

-1.9

-0.9

-0.5

-0.6

Fixed investment

9.4

5.1

3.3

5.4

7.0

7.1

-0.8

-1.8

-1.4

0.1

Exports, GNFSd

Imports, GNFSd
Net exports, contribution
to growth
Memo items: GDP
SSA excluding South Africa
Oil exporters

e

6.3

2.2

1.5

2.0

2.6

2.6

0.7

-0.3

-0.3

-0.2

3.0

1.4

2.3

3.1

3.7

3.8

-1.9

-1.0

-0.3

0.2

0.9

0.2

-0.3

-0.4

-0.4

-0.4

0.8

0.2

0.0

-0.1

5.8

3.7

1.8

3.5

4.2

4.3

0.1

-1.4

-1.3

-0.9

5.6

2.9

-0.2

1.9

2.9

3.0

0.2

-1.9

-1.9

-1.3

CFA countriesf

5.7

4.3

4.3

4.8

5.3

5.5

0.3

-1.0

-0.5

-0.4

South Africa

1.6

1.3

0.4

1.1

1.8

1.8

0.0

-0.2

0.0

-0.2

Nigeria

6.3

2.7

-1.7

1.0

2.5

2.5

0.0

-2.5

-2.5

-1.5

Angola

5.4

3.0

0.4

1.2

0.9

0.9

0.2

-0.5

-1.9

-2.5

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Central African
Republic, São Tomé and Príncipe, Somalia, and South Sudan.
b. Sub-region aggregate excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan, for which data limitations prevent the forecasting of GDP components.
c. The sudden surge in private consumption in the region in 2013 is driven by the revised and rebased NIA data of Nigeria in 2014.
d. Exports and imports of goods and non-factor services (GNFS).
e. Includes Angola, Cameroon, Chad, Democratic Republic of Congo, Gabon, Nigeria, Republic of Congo, and Sudan.
f. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Côte d’Ivoire, Equatorial Guinea, Gabon, Mali, Niger, Republic of Congo, Senegal, and Togo.
For additional information, please see www.worldbank.org/gep.

174

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 2.6.2 Sub-Saharan Africa country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)
2014

2015

2016

2017

Estimates

2018

2019

2015
2016
2017
2018
(percentage point difference

Projections

from June 2016 projections)

Angola

5.4

3.0

0.4

1.2

0.9

0.9

0.2

-0.5

-1.9

-2.5

Benin

6.5

5.0

4.6

5.2

5.3

5.3

-0.2

-0.9

-0.6

-0.8

Botswanab
Burkina Faso

3.2
4.0

-0.3
4.0

3.1
5.2

4.0
5.5

4.3
6.0

4.3
6.0

0.0
0.0

-0.6
0.0

-0.3
0.0

-0.1
0.0

-1.4
0.5

-3.5
1.5

-1.0
1.4

-0.5
1.3

4.7

-3.9

-0.5

2.5

3.5

3.5

Cameroon

1.8
5.9

1.5
5.8

3.0
5.6

3.3
5.7

3.5
6.1

3.5
6.1

-0.4

-0.4

-0.4

-0.1

Chad

6.9

1.8

-3.5

-0.3

4.7

6.3

0.0

-3.1

-1.9

-0.5

Comoros

2.1
9.5

1.0
6.9

2.0
2.7

2.5
4.7

3.0
5.0

3.0
5.0

-1.3

-0.4

-0.5

-0.1

6.8
8.5

2.6
8.4

4.6
7.8

4.3
8.0

3.7
8.1

3.7
8.1

-0.8
0.0

-3.6
0.8

-3.0
1.1

-3.5
0.7

0.0

-0.7

0.0

0.0

-8.3
9.6
3.9
4.7

-5.7
8.4
3.2
0.5

-5.7
8.9
3.8
0.8

-6.6
8.6
4.6
2.6

-6.6
8.6
4.6
2.6

7.2
0.0
-0.1

-7.2
1.3
-0.7

-4.7
-0.5
-0.6

-5.0
0.0
0.0

Gambia, The

-0.7
10.3
4.3
0.9

7.2

4.5

-3.7

-2.9

Ghana

4.0

3.9

3.6

7.5

8.4

8.4

0.5

-1.6

-0.7

0.9

GuineaGuinea-Bissau
Kenya

1.1
2.5
5.3

0.1
4.9
5.6

5.2
4.9
5.9

4.6
5.1
6.0

4.6
5.1
6.1

4.6
5.1
6.1

0.0
-0.2
0.0

1.2
-0.8
0.0

-0.4
-0.9
-0.1

-1.4
-0.9
-0.1

Lesotho

3.6

1.7

2.4

3.7

4.0

4.0

-1.0

-0.2

0.0

0.0

Liberia
Madagascar

0.7
3.3

0.0
3.1

2.5
4.1

5.8
4.5

5.3
4.8

5.3
4.8

-0.3
0.1

-1.3
0.4

0.5
0.8

-0.3
1.1

Malawi

5.7
7.0

2.8
6.0

2.5
5.6

4.2
5.1

4.5
5.0

4.5
5.0

0.0

-0.5

0.1

-0.9

0.5

0.3

0.0

0.0

3.0
3.4

4.0
3.2

4.2
3.5

3.8
3.8

3.8
3.8

0.0

-0.2

-0.3

0.5

Mauritius

6.4
3.6

-0.2

-0.6

-0.5

-0.2

Mozambique
Namibia

7.4
6.4

6.6
5.3

3.6
1.6

5.2
5.0

6.6
5.4

6.6
5.4

0.3
0.8

-2.2
-2.6

-2.5
-0.4

-1.7
-0.1

Niger
Nigeria
RwandaSenegal

6.9
6.3

3.5
2.7

5.0
-1.7

5.3
1.0

6.0
2.5

6.0
2.5

7.0
4.3

6.9
6.5

6.0
6.6

6.0
6.8

7.0
7.0

7.0
7.0

-0.7
0.0
-0.2
0.0

-0.4
-2.5
-0.8
0.0

-1.0
-2.5
-1.2
0.0

-1.0
-1.5
-0.1
0.0

BurundiCabo Verde

Congo, Dem. Rep.
Congo, Rep.
Côte d'Ivoire
Equatorial Guinea
Ethiopiab
Gabon

Mali
Mauritania

Seychelles

3.2

4.3

3.8

3.5

3.5

3.5

0.0

0.1

-0.1

-0.1

Sierra Leone
South Africa

4.6

-21.1

3.9

6.9

5.9

5.9

1.3
4.2

0.4
3.5

1.1
3.7

1.8
3.7

1.8
3.7

-2.6
-0.2

1.6
0.0

0.5
-0.2

Sudan

1.6
3.1

0.4
0.0
1.0

0.2

-0.1

-0.3

Swaziland

2.7

1.7

-0.9

1.9

3.1

3.1

0.0

-2.2

0.5

1.5

Tanzania

7.0
5.9

7.0
5.5

6.9
5.4

7.1
5.0

7.1
5.5

7.1
5.5

0.0

-0.3

0.0

0.0

0.0

-0.2

0.0

0.0

4.8

5.0

4.6

5.6

6.0

6.0

5.0
3.8

2.8
1.1

2.9
0.4

4.0
3.8

4.2
3.4

4.2
3.4

0.0
-0.8
0.0

-0.4
-0.5
-1.0

-0.3
-0.2
-1.8

-0.8
-0.8
-0.1

Togo
UgandabZambiaZimbabwe

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan.
b. Fiscal-year based numbers.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SUB-SAHARAN AFRICA

BOX 2.6.1 Recent investment slowdown: Sub-Saharan Africa
Investment growth in Sub-Saharan Africa has fallen from nearly 8 percent in 2010 to 0.3 percent in 2015, reflecting a severe
terms-of-trade deterioration and long-standing structural impediments, including infrastructure bottlenecks and weak businessenvironments. Investment needs are sizable across a wide range of sectors. Policies to address the region’s investment needs ininfrastructure include sustaining public investment, encouraging private sector participation in infrastructure, and strengthening
public financial management capacity.
Sub-Saharan Africa (SSA) accounted for a modest 2
percent of global investment, on average, during 2010-15.
However, it suffered the sharpest investment growth
slowdown among emerging market and developing
economies (EMDE) regions despite large-scale public
investment efforts until recently. Investment growthslowed from nearly 8 percent in 2010 to 0.3 percent in2015, on average—well below the long-term (1990-2008)
average of about 6 percent.
This box discusses the following questions.
•

How has investment growth in the region evolved?

•

What were the main sources of the investment growth
slowdown?

•

What are the remaining investment needs?

•

Which policies can help address Sub-Saharan Africa’s
infrastructure investments needs?

The investment growth slowdown in Sub-Saharan Africa isconcentrated in South Africa and oil exporters. It reflected
domestic political tensions, a sharp terms of trade
deterioration and, in some economies, domestic policy
tightening. Investment needs remain sizable in agriculture,
infrastructure, and health and education.

How has investment in the region evolved?
For Sub-Saharan Africa as a whole, investment growth
averaged about 5 percent in 2010-2015, less than half theaverage annual growth of 12 percent recorded prior the
global financial crisis, despite rapid public investment
growth until 2014. In more than two-thirds of SSA
countries, investment growth was below its long-term
average in 2015 and, in more than one-third, it was
negative (Figure 2.6.1.1).
Investment growth was particularly weak in South Africa
and a number of oil exporters, but was robust amongmetals exporters. Investment growth averaged just 2.5
percent per year in South Africa in 2010-15, comparedwith over 9 percent in 2000-08, reflecting deep structural
Note: This box was prepared by Gerard Kambou.

constraints,
enterprises.

includinginefficiencies

instate-owned

Among oil exporters, investment growth slowed
significantly in Angola, Chad, and Nigeria; and was
negative in Equatorial Guinea. The sharp decline in oil
prices was compounded by the introduction of foreignexchange controls or weak business environments thatweighed on investors’ sentiment. However, in Cameroon
and Gabon, large infrastructure programs continued toraise investment growth, despite a decline in investment in
the oil industry.
Investment growth in metals-exporting countries averaged
11.3 percent per year over the period 2010-15 (comparedwith 8.5 percent in 2000-08), with double-digit growth
rates in Ghana, Mozambique, and Namibia. Investment
growth in Ghana benefited from a more stable economic
environment, while Mozambique’s and Namibia’s
extractive industries continued to attract foreign
investment. Some metals exporters were subject todomestic shocks that held back investment, including
power shortages (Botswana, Zambia), deteriorating
security conditions (Niger), the Ebola virus (Liberia, Sierra
Leone), and political uncertainty (the Democratic
Republic of Congo, Zambia).
Investment growth has been solid in the agricultural
exporters, such as Côte d’Ivoire, Ethiopia, and Senegal,
supported by the implementation of infrastructuredevelopment projects. However, investment growthstagnated in commodity importers such as Cabo Verdeand Mauritius, reflecting a slowdown in their main trading
partners. It was highly volatile in a number of fragile orconflict affected countries.

What were the main sources of the investment
slowdown?
External shocks, including the end of the commodity supercycle, a marked slowdown in major trading partners, andrising domestic vulnerabilities contributed to theinvestment growth slowdown in the region. Prior to theglobal financial crisis, higher commodity prices, low global
risk aversion and favorable domestic growth prospects
prompted significant capital inflows in the region. Average

175

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.6.1 Recent investment slowdown: Sub-Saharan Africa (continued)
FIGURE 2.6.1.1 Investment growth slowdown
Investment growth has slowed sharply from about 8 percent in 2010 to near-zero in 2015, despite significant public investment
until 2014. The slowdown has reflected a severe terms of trade deterioration in commodity exporters as well as long-standing
structural bottlenecks and political tensions.
A. Investment growth

C. Share of SSA EMDEs with weak
investment growth

B. Output growth

1990-2008 avg

Percent
14

2003-08 avg

1991-2008 avg

Percent
75

2003-08 avg

Below long-term averageContracting

10
50

6
2

OverallCom. exp. Com. imp.

Overall

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

2012

2010

2014

-2
2012

2010

Percent
14
12
10
8
6
4
2
0
-2
-4

Com. exp. Com. imp.
SSA

EMDE

25

0
2010

EMDE

2011

2012

D. Contributions to investment growth

E. Terms of trade changes

F. Political stability

Percentage points
20

Percent
15

Index, 0-100 (100=best)
65

Public15

PrivateEnergy exporters
Non-energy commodity exporters

10

10
5
0

Commodity exporters
excl. South Africa andNigeriaSouth Africa andNigeria

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

-5

2013

2014

2015

60

5

2010

176

0

55

-5

50

Energy exporters
Non-energy commodity exporters

-10
45

-15
-20

40
2010

2011

2012

2013

2014

2015

2010

2011

2012

2013

2014

2015

Sources: Haver Analytics; Oxford Economics; World Economic Outlook, International Monetary Fund; World Bank Development Indicators, World Bank; Political Risk
Services International Country Risk Guide (ICRG).
A. Weighted averages.
C. Long-term averages are country-specific and refer to available data over 1990-2008.

net FDI inflows grew from 0.5 percent of GDP in 19741994 to 2.2 percent of GDP in 1995-2008 (Calderon and
Boreux 2016). By contrast, over the period 2010-15,
which saw a sharp decline in commodity prices, net FDI
flows averaged 1.9 percent of GDP.

FDI flows were negative in Angola and Equatorial Guinea.
In contrast, in oil importers, net FDI flows rose, averaging
over 3 percent of GDP, as investors responded to growth
opportunities in construction, light manufacturing andrenewable energy.

This period of investment growth slowdown in the region
coincided with a weak growth recovery in the European
Union, the slowdown of economic activity in China as it
embarked on the rebalancing of its economy toward moredomestic consumption, and the appreciation of the U.S.
dollar. The European Union, the United States, andChina are the region’s main sources of foreign investment.
The triple blow of weak growth in major export markets,
lower commodity prices and a higher U.S. dollar hits theregion’s oil exporters particularly hard. During 2010-15,
net FDI flows averaged just 0.4 percent of GDP in oil
exporters, down from 2.5 percent of GDP in 2004-08. Net

In addition to the unfavorable external environment, theslowdown in investment growth reflected weak
macroeconomic fundamentals and policies, and an
uncertain institutional and legal framework in somecountries. Fiscal and current account balances havedeteriorated across the region over the past 5 years (WorldBank 2015u). In 2014, 33 countries registered fiscal
deficits greater than 5 percent of GDP (up from 25 in2007), while 15 countries had a current account deficitthat exceeded 5 percent of GDP (up from only 5 in 2007)(Calderon and Boreux 2016). This meant that, in somecountries, policy makers lacked the ability to conductGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SUB-SAHARAN AFRICA

BOX 2.6.1 Recent investment slowdown: Sub-Saharan Africa (continued)
countercyclical policies to support economic activity, whilerising vulnerabilities weighed on capital inflows. Largecurrent account deficits and falling capital flows put
pressures on real exchange rates. Rising inflation, reflecting
deep currency depreciations, prompted central banks in a
number of commodity exporters to tighten policy, making
it costly for firms to invest.
In many countries, basic reforms to improve the businessenvironment—including the rule of law—have been
negligible, especially among resource–rich countries.
Uncertainty about the enforcement of contracts, property
rights and the direction of policy was compounded byweak investment planning and execution capacity. These
factors played a significant role in slowing investment
growth across the region.

What are Sub-Saharan Africa’s remaining
investment needs?
Sub-Saharan Africa’s strategic priorities to reinvigorate
growth and reduce poverty call for investments inagriculture, infrastructure, and health and education(World Bank 2016z).
In agriculture, which provides the livelihood for almost two-thirds of Sub-Saharan Africa’s population, investments areneeded to raise farm productivity. Increasing investments
in agricultural R&D is not only essential for boosting
growth in the region but also for accelerating its
transformation. Infrastructure investments are needed tosupport agricultural productivity growth and potential
export diversification. These include investments to build
or improve irrigation, road, and storage infrastructure, andto develop higher value chains and markets.
Countries in the region have made progress in improving
their infrastructure, although results vary. Improved
infrastructure was partly responsible for the region’s recent
strong growth performance (Calderon and Serven 2008).
That contribution reflected mostly advances in
information communication technology (ICT). The region
has experienced an unprecedented increase in mobile
phone subscriptions. By contrast, progress in the power
sector has been far more limited. Only a third ofhouseholds have access to electricity (World Bank 2016z).
•

The deterioration in the quantity and quality of power
infrastructure has increased the need for investment inrenewable energies. These have the potential to
improve access to electricity while addressing climatechange challenges.

•

Transport infrastructure development has also been
limited. In many countries, only a small proportion of
the road network is paved. Railways development isinadequate.

Across the region, investments are needed to improve thequality of education and skills, the health status of the
populations, and the coverage of infrastructure services,notably access to improved sanitation. Despite recent
progress, Sub-Saharan Africa lags other regions (Figure
2.6.1.2).
The region’s infrastructure investment needs are large,
estimated at 15 percent of GDP, reflecting insufficient andinefficient spending on capital, operation, andmaintenance expenditures (Foster and Briceno-Garmendia
2010). Financing to address these investment needs has
increased. The external sources of financing forinfrastructure have expanded. Official development finance(ODF)—led by the World Bank and the African
Development Bank—has increased appreciably. ODF
investments are supporting transport and water andsanitation investments in a number of countries. China
emerged as a major bilateral source. Chinese investments
have increasingly targeted the energy sector andhydropower in particular. Direct private sector
involvement surged. Private participation in infrastructure(PPI) now accounts for more than half of total externalfinance, with a large share of the investments going to thetelecom, energy and transport sectors (Gutman, Sy, andChattopadhyay 2015).

Which policies can help address the region’s
remaining infrastructure investment needs?
Financing from multilateral development banks, China,
and the private sector tripled between 2004 and 2012
(Gutman, Sy, and Chattopadhyay 2015). Externalfinancing for infrastructure grew fastest in the energy
sector, with Ethiopia, Ghana, Kenya, Nigeria, and South
Africa among the largest recipients. Untapped
opportunities remain, including in renewable energy(EBRD 2016) as well as in other investments that can
support private sector development. Innovative financing
solutions for infrastructure investment that mitigate risk
factors for investors have been developed. Tools such as
blended finance, co-financing between private investors
and development finance institutions, public-private
partnerships and climate finance are being deployed incountries across the region (IFC 2016). Nevertheless,financing investment projects remain challenging.
Although private investment has become significant and177

CHAPTER 2.6

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 2.6.1 Recent investment slowdown: Sub-Saharan Africa (continued)
FIGURE 2.6.1.2 Investment needs
Sub-Saharan Africa’s investment needs are high across a wide range of sectors. There has been progress in improving
infrastructure in the region, but progress has been slow, especially in energy and transport.
A. Total infrastructure spending needs

B. International perspective on Africa's Infrastructure deficit

US$, billions
200
Capital expenditure180
Operation and maintenanceTotal spending
160

Normalized units
1,500

SSA middle-income countries
Other middle-income countries
SSA low-income countries
Other low-income countries

1,200
900

140
120

600

100

300

80

Transport

WSS

Power

Total

Improved water

D. Selected education indicators

C. Selected health care indicators
Per capita
5,000

Improved sanitation

ICT

Electricity coverage

Irrigation

Generation capacity

0Internet density

20

Mobile density

40

Main-line density

60

Total road density

0

Paved-road density

178

Percent of population
120
100

4,000

Percent of per capita
income, ratio
45
40
35

80

Range
AE
EMDEs
SSA

30

3,000
60
Range
AE
EMDE
SSA

2,000

1,000

25
20

40
15
20

10
5

0

0
Health expenditure Improved sanitation
(LHS)
(RHS)

Improved water
source (RHS)

0
Government expenditure

Pupil-teacher ratio

Source: Haver Analytics; Pierce, and Foster 2008; Regional Economic Outlook, International Monetary Fund; World Bank; Yepes.
A. ICT=information and communication technology; WSS=water supply and sanitation. Estimates by Foster and Briceno-Garmendia (2010).
B. Road density is measured in kilometers per 100 square kilometers of arable land; telephone density in lines per thousand population; generation capacity inmegawatts per million population; electricity, water, and sanitation coverage in percentage of population. SSA stands for Sub-Saharan Africa.
C. Blue bars denote range of unweighted regional averages across EMDE regions. Health expenditure per capita in purchasing power parity terms, unweighted averagesof 199 EMDEs, 34 AEs, and 47 SSA economies. Access to improved sanitation facilities (in percent of population), unweighted averages for 150 EMDEs, 33 AEs,and 47 SSA economies. Access to improved water sources (in percent of population), unweighted averages for 148 EMDEs, 34 AEs, and 47 SSA economies. AE stands
for advanced economies; and EMDE for emerging market and developing economies. Latest available data available during 2011-15.
D. Blue bars denote range of unweighted regional averages across EMDE regions. Government expenditure per primary student (in percent of per capita income),
unweighted averages of 87 EMDEs, 32 AEs, and 29 SSA economies. Pupil-teacher ratio in primary education (headcount basis), unweighted averages for 165 EMDEs,
31 AEs, and 44 SSA economies. Latest available data available during 2011-15.

covers a broad range of countries, it has focused more on
ICT than other sectors.
Despite the rising importance of external finance, public
sector budgets remain the primary source of funding forinfrastructure investments in the region. Countries acrossthe region finance about 65 percent of their infrastructure
expenditures with domestic resources (IMF 2014b). In
some countries, the fiscal space created by the heavily
indebted poor countries (HIPC) debt relief facilitated theseGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SUB-SAHARAN AFRICA

BOX 2.6.1 Recent investment slowdown: Sub-Saharan Africa (continued)
expenditures. Others took advantage of low interest rates
to issue Eurobonds to finance infrastructure investments.
Governments spend most of their resources on transportand energy. Nonetheless, the level of public financeremains insufficient to cover their infrastructure needs. Sub-Saharan African countries need to mobilize moredomestic resources to finance infrastructure investment.
Tax-to-GDP ratios are far below the EMDE average in a
number of countries, reflecting a failure to reform weak tax
systems, especially in oil exporters.

manageable, and borrowing to increase spending on
infrastructure remains a viable option. However, debt
sustainability should not be compromised.
•

Encouraging greater private sector participation in
infrastructure. Countries need to strengthen thepipeline of bankable projects that can meet thefinancial objectives of private investors. Innovative
fund and deal structures, such as guarantees and risk
sharing, should be developed. Blended financeinstruments that can leverage private sector
development financing should be promoted. Publicprivate partnerships (PPPs) are a tested strategy thatcan be applied to numerous sectors (IFC 2016).
However, governments have to establish autonomous
regulatory agencies to oversee the private agents. The
terms of the partnerships have to be monitored
carefully to ensure PPPs deliver a normal return andnot a monopoly profit.

•

Strengthening public investment management systems.
An effective public financial management capacity is
critical in scaling up infrastructure investment
spending. Countries should seek to strengthen
capacity for project selection and appraisal, andenhance monitoring of project execution to minimize
leakages. Operation and maintenance expenditures forexisting infrastructure should be fully integrated in a
medium-term expenditure framework to ensure thatthey receive adequate budgetary resources.

•

Promoting regional integration of infrastructure. A
regional approach to the provision of infrastructureservices is needed to overcome the region’s geographic
and physical challenges. This will require effective
regional institutions, setting priorities for regional
investments, harmonizing regulatory frameworks andadministrative procedures, and facilitating crossborder infrastructure (Kessides and Benjamin 2012).

The capacity of countries in the region to effectively use
resources for infrastructure investment remains a criticalissue. The efficiency of public investment in Sub-SaharanAfrica lags behind other EMDEs, reflecting poor project
selection, weak enforcement of procurement procedures,and failure to complete projects (Dabla-Norris et al. 2012).
These weaknesses point to a need to increase absorptive
capacity in public infrastructure in the region.
Sub-Saharan Africa’s infrastructure development faces
major geographic and physical challenges, reflecting its low
population density, low urbanization, and large number oflandlocked countries. A sizable number of small countries
makes it difficult for firms to exploit economies of scale.
As a result, Sub-Saharan Africa’s infrastructure services are
more expensive than in other regions, suggesting that
greater gains could be achieved through deeper forms ofregional integration.
Four key areas of policy priorities to address investment
needs and ensure sustainable financing are the following:•

Sustaining public investments. Domestic resources—
tax and nontax revenue—are likely to remain thedominant source of financing for infrastructure.
Increasing domestic revenue may provide the mostsustainable way of financing infrastructure investment.
This will require improving tax collection as well as
cost recovery. In many countries, debt levels are still179

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

References
Abeberese, A. 2016. “Electricity Cost and Firm
Performance: Evidence from India.” Review of
Economics and Statistics (forthcoming).
Abino, D. J., R. A. Adrias, J. J. Damot and Z. M.
Virtucio. 2014. “Philippine Financial System
Macrofinancial Vulnerabilities: Assessing and
Forecasting Systemic Risk using LOGIT and
VAR.” Research Paper presented at the DLSU
Research Congress 2014. `De La Salle University,
Manila, Philippines.
ADB (Asia Development Bank). 2009.
Infrastructure for a Seamless Asia. Manila,
Philippines: Asia Development Bank.
________. 2012. Infrastructure for Supporting
Inclusive Growth and Poverty Reduction in Asia.
Manila, Philippines: Asia Development Bank.
________. 2016. “Central Asian Countries
Identify $94 Billion Energy Investment Needs to2023.” News Release October 24, 2016. Manila:
Asian Development Bank.
Alfaro, L., and A. Chari. 2014. “Deregulation,
Misallocation, and Size: Evidence from India.”
Journal of Law and Economics 57 (4): 897-936.
Ali, A., 2009. “Effects of Corruption on FDI
Inflows.” Cato Journal 29 (2), Spring/Summer.
Allard, C., J. I. C. Kriljenko, W. Chen, J.
Gonzalez-Garcia, E. Kitsios, and J. Trevino. 2016.
“Trade Integration and Global Value Chains in
Sub-Saharan Africa: In Pursuit of the Mission
Link.” IMF African Department. International
Monetary Fund, Washington, DC.
Anadon, D. L., and K. Surana. 2015. “Public
Policy and Financial Resource Mobilization forWind Energy in Developing Countries: A
Comparison of Approaches and Outcomes in
China and India.” Global Environmental Change
35: 340–359.
Anand, R., and V. Volodymyr. 2014.
“Disentangling India’s Investment Slowdown.”

CHAPTER 2

IMF Working Paper 14/47, International
Monetary Fund, Washington, DC.
Anbumozhi, V., and P. S. Intal. 2015. “CanThinking Green and Sustainability Be an
Economic Opportunity for ASEAN?” Economic
Research Institute for ASEAN and East Asia
(ERIA).
Andres, L., D. Biller, and M. H. Dappe. 2014.
“Infrastructure Gap in South Asia.” Policy
Research Working Paper Series 7032, World
Bank, Washington, DC.
Arslanalp S., and T. Tsuda, 2014, “Tracking
Global Demand for Emerging Market Sovereign
Debt,” IMF Working Paper No. 14/39,
International Monetary Fund, Washington, DC.
Arslanalp S., W. Liao, S. Piao, and D. Seneviratne.
2016. “China’s Growing Influence on Asian
Financial Markets.” IMF Working Paper No.
16/173,
International
Monetary
Fund,
Washington, DC.
Arteta, C., M. A. Kose, F. Ohnsorge, and M.
Strocker. 2015. “The Coming U.S. Interest Rate
Tightening Cycle: Smooth Sailing or Stormy
Waters?” Policy Research Note 15/02, World
Bank, Washington, DC.
Aturupane, H., Y. Savchenko, M. Shojo, and K.
Larsen. 2014. “Sri Lanka: Investment in Human
Capital. South Asia.” Human Development Sector
Discussion Paper Series 69, World Bank,
Washington, DC.
Bank for International Settlements. 2016.
International Banking and Financial Market
Developments. BIS Quarterly Review (September2016), Bank for International Settlements, Basel,
Switzerland.
Baker, S., N. Bloom, and S. Davis. 2015.
“Measuring Economic Policy Uncertainty.”
NBER Working Paper 21633, National Bureau of
Economic Research, Cambridge, MA.
Behar, A., and A. Fouejieu. 2016. “External
Adjustment in Oil Exporters: The Role of Fiscal
Policy and the Exchange Rate.” IMF Working

180

181

CHAPTER 2

Paper 16/107, International Monetary Fund,
Washington, DC.
Benno, F., and A. Ramayandi. 2015. “Public Debt
Sustainability in Developing Asia: An Update.”
ADB Economics Working Paper Series 468, Asia
Development Bank, Manila, Philippines.
Bhattacharya, A., M. Romani, and N. Stern.
2012. “Infrastructure for Development: Meeting
the Challenge.” London, United Kingdom:Centre for Climate Change Economics andPolicy.
Bhattacharyay, B. N. 2012, “Estimating demandfor infrastructure 2010-2020,” In Infrastructure for
Asian Connectivity, edited by B. N. Bhattacharyay,
M. Kawai, and R. Nag. Asia Development Bank
Institute and Asia Development Bank: Edward
Elgar.
Bleaney, M., and Halland, H., 2016. “Do
resource-rich countries suffer from a lack of fiscal
discipline?” World Bank Policy Research Working
Paper 7552, World Bank, Washington, DC.
Bloom, D., M. Kuhn, and K. Prettner. 2016.
“Africa’s Prospects for Enjoying a Demographic
Dividend.” VOX, CEPR’s Policy Portal. October 2016.
Bloom, D. E., and L. Rosenberg. 2011. “The
Future of South Asia: Population Dynamics,
Economic Prospects and Regional Coherence.”
Program on the Global Demography of Aging
Working Paper Series 68, Cambridge,
Massachusetts.
BMI (Business Monitor International a Fitch
Group Company) Research. 2016. “Asia
Infrastructure: Reforms Essential to Unlock
Growth.” Regional Overview (October issue).
Borin, A., and E. Di Stefano. 2016. “Economic
Reforms in China and India: Past and Future
Challenges.” Occasional Papers Series 337, Bankof Italy, Milan.
Bryson, J. H., and E. Nelson. 2016. “Does China
Face a Japanese-Like “Lost Decade”? Special
Commentary. Wells Fargo.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Burke, P. J., and R. C. Paudel. 2015. “Exchange
Rate Policy and Export Performance in a
Landlocked Developing Country: The Case of
Nepal.” Journal of Asian Economics, 38 (June):
55–63.
Cabral, R., F. G. Carneiro, and A. V. Mollick.
2016. “Inflation Targeting and Exchange Rate
Volatility in Emerging Markets.” Policy
Research Working Paper 7712, World Bank,
Washington, DC.
Caggiano, G., and P. Calice. 2016. “Bank
Competition, Financial Dependence, andEconomic Growth in the Gulf Cooperation
Council.” Policy Research Working Paper 7687,
World Bank, Washington, DC.
Calderon C., and S. Boreux. 2016. “Ctius, Altius,
Fortius: Is Growth in Sub-Saharan Africa More
Resilient?” Journal of African Economies 24 (4):502-528
Calderón, C., and L. Servén. 2003. “The Output
Cost of Latin America’s Infrastructure Gap.” In:
W. Easterly and L. Servén, editors. The Limits ofStabilization: Infrastructure, Public Deficits and
Growth in Latin America. Stanford, United States:
Stanford University Press.
________. 2008. “Infrastructure and Economic
Development in Sub-Saharan Africa.” Policy
Research Working Paper No. 4712. World Bank:
Washington, DC.
Calderon, C., E. Moral-Benito, and L. Servén.
2011. “Is Infrastructure Capital Productive? A
Dynamic Heterogeneous Approach.” Policy
Research Working Paper 5682, World Bank,
Washington, DC.
Catao, L., and M. Terrones. 2016. “Financial DeDollarization: A Global Perspective and the
Peruvian Experience.” IMF Working Paper 16/97,
International Monetary Fund, Washington, DC.
Cavalcanti, T., K. Mohaddes, and R. Mehdi,
2015. "Commodity Price Volatility and the
Sources of Growth." Journal of Applied
Econometrics 30 (6): 857-873.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Celasun, O., F. Grigoli, K. Honjo, J. Kapsoli, A.
Klemm, B. Lissovolik, J. Luksic, et al. 2015.
“Fiscal Policy in Latin America: Lessons andLegacies of the Global Financial Crisis.” Staff
Discussion Note 15/06, International Monetary
Fund, Washington, DC.
Central Asia Regional Economic Cooperation.
2016 “CAREC: Study for Power Sector Financing
Road Map Mobilizing Financing for Priority
Projects.” http://www.carecprogram.org/uploads/
events/2016/19-Energy-Investment-Forum/
Summary-Presentations/
CAERC_TA8727_RegionalSummary.pdf.
Cerra, V., A. Cuevas, C. Goes, I. Karpowicz, T.
Matheson, I. Samake, and S. Vtyurinaet. 2016.
“Highways
to
Heaven:Infrastructure
Determinants and Trends in Latin America andthe Caribbean.” IMF Working Paper 16/185,
International Monetary Fund, Washington, DC.
Cherif, R., F. Hasanov. And M. Zhu. 2016.
Breaking the Oil Spell: The Gulf Falcons’ Path toDiversification. Washington, DC: International
Monetary Fund.
Chinoy, S., P. Kumar, and P. Mishra. 2016.
“What is Responsible for India’s Sharp
Disinflation?” IMF Working Paper 16/166,
International Monetary Fund, Washington, DC.
Chow, J. T. S. 2015. “Stress Testing Corporate
Balance Sheets in Emerging Economies.” IMF
Working Paper 15/216, International Monetary
Fund, Washington, DC.
Claessens, S. 2015. “An Overview ofMacroprudential Policy Tools.” Annual Review of
Financial Economics 7.1: 397-422.
Clark, J., N. Converse, B. Coulibaly, and S.
Kamin. 2016. “Emerging Market Capital Flowsand U.S. Monetary Policy.” Board of Governorsof the Federal Reserve System, International
Finance Discussion Paper Note, October.
Coppola, A., A. Lagerborg, and Z. Mustafaoglu.
2016 “Estimating an Equilibrium Exchange Ratefor the Argentine Peso.” Policy Research Working
Paper 7682, World Bank, Washington, DC.

CHAPTER 2

Corral, L., M. Schling, C. Rogers, J.
Cumberbatch, F. Hinds, N. Zhou, and M.
Lemay. 2016. “The Impact of Coastal
Infrastructure Improvements on Economic
Growth: Evidence from Barbados.” IDB Working
Paper Series No. IDB-WP-729, Inter-American
Development Bank, Washington, DC.
Creehan, S. 2015. “Why We Shouldn’t Invoke
Japan’s “Lost Decade” as China’s Future.” PacificExchange Blog October 8, 2015. Federal Reserve
Bank of San Francisco.
Dabla-Norris, E., G. Ho, and A. Kyobe. 2016.
“Structural Reforms and Productivity Growth inEmerging Market and Developing Economies.”
IMF Working Paper 07/201, International
Monetary Fund, Washington, DC.
Dabla-Norris, E., J. Brumby, A. Kyobe, Z. Mills,
and C. Papageorgiou. 2012. “Investing in Public
Investment: An Index of Public Investment
Efficiency.” Journal of Economic Growth 17 (3):
235–66.
Dash, P. K., G. Nafaraj and P. Sahoo. 2014.
Foreign Direct Investment in South Asia: Policy,
Impact, Determinants and Challenges. New Delhi:
Springer.
Davis, J. S. 2015. “External Debt Sheds Light on
Drivers of Exchange Rate Fluctuations.”
Economic Letter 10 (4), Federal Reserve Bank of
Dallas.
De Janvry, A., and E. Sadoulet. 2012. “WhyAgriculture Remains the Key to Sub-SaharanAfrican Development.” In The Oxford Companion
to the Economics of Africa, edited by E. Aryeetey, S.
Devarajan, R. Kanbur, and L. Kasekende.
Oxford, U.K.: Oxford University Press.
De la Torre, A., T. Didier, and M. Pinat. 2014.
“Can Latin America Tap the Globalization
Upside?” Policy Research Working Paper 6837,
World Bank, Washington, DC.
De, S., E. Islamaj, M. A. Kose, and S.R. Yousefi.
2016. “Remittances over the Business Cycle:
Theory and Evidence?” Working Paper No.

182

183

CHAPTER 2

13/2016, Centre for Applied Macroeconomic
Analysis, Crawford School of Public Policy,
Australian National University Australia.
Deutsche Bank. 2016. “Asia Infrastructure
Financing.” Current Issues, Emerging Markets,
January 8.
Devarajan, S., E. Ianchovichina, and C. Lakatos.
2016. “Lifting Economic Sanctions on Iran:
Global Effects and Strategic Responses.” Policy
Research Working Paper Series 7549, World
Bank, Washington, DC.
Diziolo, A., J. Guajardo, V. Klyuev, R. Mano, and
M. Raissi. 2016. “Spillover from China’s Growth
Slowdown and Rebalancing to the ASEAN-5.”
IMF Working Paper No. 16/170, International
Monetary Fund, Washington, DC.
EBRD (European Bank for Reconstruction andDevelopment), EIB (European Investment Bank),
and World Bank. 2016. “What’s Holding Back
the Private Sector in MENA? Lessons from theEnterprise Survey.” European Bank for
Reconstruction and Development, European
Investment Bank, and World Bank.
EBRD. 2015a. EBRD Transition Report 2015-16.
London: European Bank for Reconstruction andDevelopment.
______. 2015b. Strategy for Turkey. London:
European Bank for Reconstruction andDevelopment.
______. 2016. “Responding to Africa’s Energy
Needs.” European Investment Bank, Luxembourg.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Transformation for Prosperity and Livability.
Washington, DC: World Bank.
Engel, E., R. Fischer, and A. Galetovic. 2011.
“Public-Private Partnerships to Revamp U.S.
Infrastructure.”
Brookings
Institution,
Washington, DC. https://www.brookings.edu/
research/public-private-partnerships-to-revamp-us-infrastructure/.
ESCAP 2015. Economic and Social Survey of Asiaand the Pacific 2015. United Nations Economic
and Social Commission for Asia and the Pacific.
Estache, A., and G. Garsous. 2012. “The Impact
of Infrastructure on Growth in Developing
Countries.” IFC Economics Notes Note 1, World
Bank, Washington, DC.
Estache, A., E. Ianchovichina, R. Bacon, and I.
Salamon. 2013. Infrastructure and Employment
Creation in the Middle East and North Africa.
Washington, DC: World Bank.
Farole, F., and V. Pathikonda. 2016. “TheCapabilities Driving Participation in Global Value
Chains.” Policy Research Working Paper Series
7804, World Bank, Washington, DC.
Fay, M., and T. Yepes. 2003. “Investing in
Infrastructure: What Is Needed from 2000 to
2010?” Policy Research Working Paper No. 3102.
Washington, DC: World Bank.
Fernandez, A., A. Gonzalez, and D. Rodriguez.
2015. “Sharing a Ride on the Commodities Roller
Coaster: Common Factors in Business Cycles ofEmerging Economies.” Central Bank of Colombia
Working Paper 915.

Eichengreen, B., and P. Gupta. 2013. “The RealExchange Rate and Export Growth: Are Services
Different?” Policy Research Working Paper Series
6629, World Bank, Washington, DC.

Foreign Affairs. 2013 “Turkey: A Landmark
Decade Vision 2023.” Foreign Affairs, SeptemberOctober 2013.

EIU (Economist Intelligence Unit). 2016. Latin
America: Regional Overview. September. London:
Economist Intelligence Unit.

Foster, V. and C. Briceno-Garmendia. 2010.
“Africa’s
Infrastructure:
A
Time
for
Transformation.” World Bank. Washington, DC.

Ellis, P., and M. Roberts. 2016. Leveraging
Urbanization in South Asia: Managing Spatial

Frankel, J. 2013. “Exchange Rate andMonetary Policy for Kazakhstan in Light ofGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Resource Exports.” Harvard Kennedy School,
Cambridge, MA.
Garcia-Escribano, M., C. Gees, and I. Karpowicz.
2015. “Filling the Gap: Infrastructure Investment
in Brazil.” IMF Working Paper 15/180,
International Monetary Fund, Washington, DC.
Gertler, M., and P. Karadi. 2015. “Monetary
Policy Surprises, Credit Costs, and Economic
Activity.”
AmericanEconomic
Journal:Macroeconomics 7(1): 44-76.
Gill, I., I. Izvorski, W. van Eeghen, and D. De
Rosa. 2014. “Diversified Development: Making
the Most of Natural Resources in Eurasia.” World
Bank, Washington, DC.
Gobat, J., and K. Kostial. 2016. “Syria’s Conflict
Economy.” IMF Working Paper 16/123,
International Monetary Fund, Washington, DC.
Gutman J., A. Sy, and S. Chattopadhyay. 2015.
“Financing African Infrastructure; Can the World
Deliver?” in Global Economy and Development
at Brookings. Brookings Institution, Washington, DC.
Hencekl, T., and W. McKibbin. 2010. “TheEconomics of Infrastructure in a Globalized
World: Issues, Lessons and Future Challenges.”
The Brookings Institution, Washington, DC.
Horton, M. A., H. Samiei, N. P. Epstein, and K.
Ross. 2016. “Exchange Rate Developments andPolicies in the Caucasus and Central Asia.”
Middle East and Central Asia Departmental
Paper No. 16/2. International Monetary Fund,
Washington, DC.
IADB (Inter-American Development Bank).
2010. “Urbanization in Latin America and the
Caribbean: Trends and Challenges.” InterAmerican Development Bank, Washington, DC.
______. 2016. Time to Act: Latin America andthe Caribbean Facing Strong Challenges.
Washington, DC: Inter-American Development
Bank.
Ianchovichina, E., A. Estache, R. Foucart, G.
Garsous, and T. Yepes. 2013. “Job Creation

CHAPTER 2

through Infrastructure Investment in the Middle
East and North Africa.” World Development 45(May): 209–22.
IMF (International Monetary Fund). 2014a.
“Regional Economic Outlook: Middle East,
North Africa, Afghanistan, and Pakistan.”International Monetary Fund, Washington, DC.
______. 2014b. “Regional Economic Outlook:
Sub-Saharan Africa, Staying the Course.” October
2014. International Monetary Fund, Washington,
DC.
______. 2015a. Global Financial Stability Report:
Vulnerabilities, Legacies, and Policy Challenges:
Risks Rotating to Emerging Markets. Washington,
DC: International Monetary Fund.
______. 2015b. World Economic Outlook:
Adjusting to Lower Commodity Prices. October.
Washington, DC: International Monetary Fund.
______. 2015c. “Private Sector Deleveraging and
Growth Following Busts.” IMF Working Paper
15/35,
International
Monetary
Fund,
Washington, DC.
______. 2015d. “Kazakhstan: Staff Concluding
Statement of an IMF Staff Visit.” Mission
Concluding Statement, November 25.
______. 2015e. “Recent Investment Weakness in
Latin America: Is There a Puzzle?” in Western
Hemisphere Regional Economic Outlook: Northern
Spring, Southern Chills.
Washington, DC:
International Monetary Fund.
______. 2016a. “Asia: Maintaining Robust
Growth amid Heightened Uncertainty.” Regional
Economic Outlook Update series, International
Monetary Fund, Washington, DC.
______. 2016b. “China’s Growing Influence on
Asian Financial Markets.” IMF Working Paper
16/173,
International
Monetary
Fund,
Washington, DC.
______. 2016c. China, Staff Report for the 2016
Article IV Consultation. International Monetary
Fund, Washington, DC.

184

185

CHAPTER 2______. 2016d. ASEAN-5 Cluster Report—
Evolution of Monetary Policy Frameworks.
International Monetary Fund, Washington, DC.
______. 2016e. Philippines, Staff Report for the2016 Article IV Consultation. International
Monetary Fund, Washington, DC.
______. 2016f. Thailand Selected Issues.
International Monetary Fund, Washington, DC.
______. 2016g. Vietnam, Staff Report for the2016 Article IV Consultation. International
Monetary Fund, Washington, DC.
______. 2016h. “Russian Federation: Staff Reportfor the 2016 Article IV Consultation” Country
Report 16/229, International Monetary Fund,
Washington, DC.
______. 2016i. AREAER Online, International
Monetary Fund, Washington, DC.
______. 2016j. “Ukraine: Second Review Under
the Extended Fund Facility and Requests for
Waivers of Non-Observance of Performance
Criteria, Rephasing of Access and Financing
Assurances Review.” Country Report 16/319,
International Monetary Fund, Washington, DC.
______. 2016k. “Hungary: Staff Report for the2016 Article IV Consultation.” Country Report
No. 16/107, International Monetary Fund,
Washington, DC.
______. 2016l. “Latin America and the
Caribbean: Are Chills Here to Stay?” Regional
Economic Update. October. International
Monetary Fund, Washington, DC.
______. 2016m. “Iran: Concluding Statement of
an IMF Staff Visit.” International Monetary
Fund, Washington, DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Manama, Bahrain, International Monetary Fund,
Washington, DC.
______. 2016p. “Regional Economic Outlook:
Middle East, North Africa, Afghanistan, andPakistan.”International
Monetary
Fund,
Washington, DC.
______. 2016q. Sri Lanka: Staff Report for the2016 Article IV Consultation. Washington, DC:
International Monetary Fund.
______. 2016r. Regional Economic Outlook: Sub-Saharan Africa – Multispeed Growth.
Washington, DC: International Monetary Fund.
Inderst, G. 2016. “Infrastructure Investment,
Private Finance, and Institutional Investors: Asia
from a Global Perspective.” Asian Development
Bank Institute. Working Paper Series No. 555.
Tokyo.
International Energy Agency. 2014. Special Report
World Energy Investment Outlook. Paris:
International Energy Agency.
International Finance Corporation. 2016.
“Transforming African Development: Partnerships
and Risk Mitigation to Mobilize Private
Investment on a New Scale.” IFC, World Bank,
Washington, DC.
Jesintha, P., and M. Sathanapriya. 2011. “Public
Private Partnership in India.” Journal ofManagement and Science, 1 (1): 61-68.
Jin, H., and I. Rial. 2016. “Regulating Local
Government Financing Vehicles and PublicPrivate Partnerships in China.” IMF Working
Paper 16/187, International Monetary Fund,
Washington, DC.

______. 2016n. “Jordan: Request for an Extended
Arrangement under the Extended Fund Facility—
Staff Report.” International Monetary Fund,
Washington, DC.

Kessides, I., and N. Benjamin. 2012.
“Regionalizing Infrastructure for Deepening
Market Integration: the Case of East Africa.”
Policy Research Working Paper No. 6113, World
Bank; Washington, DC.

______. 2016o. “Economic Diversification in Oil-Exporting Arab Countries.” Report prepared for
Annual Meeting of Arab Ministers of Finance in

Khandelwal, P., K. Miyajima, and A. Santos.
2016. “The Impact of Oil Prices on the Banking
System in the GCC.” IMF Working

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 2

Paper 16/161, International Monetary Fund,
Washington, DC.

Economic Development in South Asia. Washington,
DC: World Bank.

Kirkpatrick C., D. Parker and Y. Zhang. 2006.
“Foreign Investment in Infrastructure in
Developing Countries: Does Regulation Make a
Difference?” Transnational Corporations 15 (1):
143–172.

Lopez-Acevedo, G., D. Medvedev, and V.
Palmade. 2016. South Asia’s Turn: Policies to Boost
Competitiveness and Create the Next Export
Powerhouse. Conference Edition. Washington,
DC: World Bank.

Kohli, H. A., and P. Basil. 2010. “Requirements
for Infrastructure Investment in Latin America
under Alternate Growth Scenarios: 2011–2040.”
Global Journal of Emerging Market Economies 3(1): 59–110.

Ly, S. 2016. “Improving Macroeconomic andFinancial Resilience.” Cambodia Economic
Update. World Bank.

Kovtun, D., A.M. Cirkel, M. Z. Murgasova, D.
Smith, and S. Tambunlertchai. 2014 “Boosting
Job Growth in the Western Balkans” In Jobs and
Growth, edited by Schindler, M., M. Berger, M.
Bakker, and M. Spilimbergo. Washington, DC:
International Monetary Fund.
KPMG. 2011. “KPMG’s Bribery and Corruption
Survey: Impact on Economy and Business
Environment.”
Lardy, N. R., and Z. Huang. 2016. “China
Private Investment Softens, But Not as Much as
Official Data Suggest.” China Economic Watch.
Peterson Institute for International Economics.
Le Borgne, E., and T. Jacobs. 2016. “Lebanon:
Promoting Poverty Reduction and Shared
Prosperity.” Systematic Country Diagnostic,
World Bank, Washington, DC.
Lee, K., and T. Pang. 2015. “Asia and the Pacific:
Health Policy Challenges of a Region inTransition.” Asia & the Pacific Policy Studies 2 (2):
211–213.

Maitra, P., S. Mitra, D. Mookherjee, A. Motta,
and S. Visaria .2016. "Financing Smallholder
Agriculture: An Experiment With AgentIntermediated Microloans in India" Center For
Economic Research Discussion Paper No.
DP11549, London, United Kingdom.
Man, R. 2013. “Bridging the Gap.” HSBC Global
Research Macro Economics – Asia.
McKinsey Global Institute. 2011. “Powering
India: The Road to 2017.” McKinsey Global
Institute.
______. 2013. Infrastructure Productivity: How to
Save $1 Trillion a Year. McKinsey Global
Institute.
______. 2014. Southeast Asia at the Crossroads:
Three Paths to Prosperity. McKinsey Global
Institute.
______. 2016. “Lions On the Move II: Realizing
the Potential of Africa’s Economies.” McKinsey &Company. September.

Leutert, W. 2016. “Challenges Ahead in China’s
Reform of State-Owned Enterprises.” Asian Policy
21: 83-99.

Mishra, P., P. Montiel, and R. Sengupta. 2016.
“Monetary
TransmissioninDeveloping
Countries: Evidence from India.” IMF Working
Paper 16/167, International Monetary Fund,
Washington, DC.

Loayza, N. V. 2016. “Informality in the Process ofDevelopment and Growth.” Policy ResearchWorking Paper Series 7858, World Bank,
Washington, DC.

Miyajima, K. 2016. “An Empirical Investigationof Oil-Macro-Financial Linkages in Saudi Arabia.”
IMF Working Paper 16/22, International
Monetary Fund, Washington, DC.

Lopez-Acevedo, G., and R. Robertson, eds. 2016.
Stitches to Riches? Apparel Employment, Trade, andMollick, A.V., R. Cabral, and F. G. Carneiro.
2011. “Does Inflation Targeting Matter for

186

187

CHAPTER 2

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Output Growth? Evidence from Industrial andEmerging Economies.” Journal of Policy Modeling33(4): 537-551.

Romer, P. 2016. “To End Poverty, Give Everyone
the Chance to Learn.” Speech at the End Poverty
Day Event, Dhaka, Bangladesh, October 17.

Montgomery, H. K. Hariyama, and Y. Takahashi.
2014. “Too Big to Succeed? Banking Sector
Consolidation and Efficiency.” Journal ofInternational Financial Markets, Institutions andMoney 32: 86-106.

Rother, B., G. Pierre, D. Lombardo, R. Herrala,
P. Toffano, E. Roos, A. G. Auclair, and K.
Manasseh. 2016. “The Economic Impact ofConflicts and the Refugee Crisis in the Middle
East and North Africa.” Staff Discussion Note
16/08,
International
Monetary
Fund,
Washington, DC.

Nataraj, G. 2007. “Infrastructure Challenges inSouth Asia: The Role of Public-Private
Partnerships.” Asia Development Bank InstituteDiscussion Paper 80, Asia Development Bank
Institute, Tokyo.
OECD (Organisation for Economic Co-operation
and Development). 2014. Education at a Glance
2014. OECD Publishing.
______. 2016. “Youth in the MENA Region:
How to Bring Them in.” Paris, OECD.
Pachouri, A., and S. Sharma. 2016. “Barriers toInnovation in Indian Small and Medium-Sized
Enterprises.” ADB Economics Working Paper
Series 588, Asia Development Bank, Manila,
Philippines.
Papageorgiou,
C.
andSpatafora,N.,
2012. “Economic Diversification in LICs: Stylized
Facts
and
Macroeconomic
Implications”
International Monetary Fund Working Paper
12/13,
International
Monetary
Fund,
Washington, DC.
Patra, M. D., S. Pattanaik, J. John, and H. K.
Behera. 2016. “Global Spillovers and Monetary
Policy Transmission in India.” WPS (DEPR)
03/2016. Reserve Bank of India.
Perrotti, D., and R. J. Sánchez. 2011. “La brecha
de infraestructura en América Latina y el Caribe.”
Serie Recursos Naturales e Infraestructura no. 153.
Santiago, Chile: Economic Commission for Latin
America and the Caribbean (ECLAC).
Republic of Turkey Ministry of Energy andNatural Resources. 2014. National Renewable
Energy Action Plan for Turkey.

Russian Investment Agency. 2015. “We Need
Investment.” http://investment-in-russia.com/site/
en?view=WE-NEED-INVESTMENT.
Samarina, A., M. Terpstra, and J. De Haan. 2014.
“Inflation Targeting and Inflation Performance: A
Comparative Analysis.” Applied Economics 46(1):41-56.
Shirke, S.V., and A. Srija. 2014. “An Analysis of
the Informal Labor Market in India.” Economy
Matters, Confederation of Indian Industry,
October.
Siddhartha, S. 2015. “Make In India: How Does
‘Make in India’ Affect the Indian Economy?”
https://www.quora.com/Make-In-India-How-does-Make-in-India-affect-the-Indian-Economy.
Sommer, M., A. Auclair, A. Fouejieu, I. Lukonga,
S. Quayyum, A. Sadeghi, G. Shbaikat, A. Tiffin,
and B. Versailles . 2016. “Learning to Live with
Cheaper Oil: Policy Adjustment in Oil-ExportingCountries of the Middle East and Central Asia.”
Middle East and Central Asia Departmental Paper
Series, International Monetary Fund, Washington,
DC.
Sondergaard, L. M., Murthi, M., Abu-Ghaida, C.
B. and Rutkowski, J., 2012. “Skills, Not Just
Diplomas: Managing for Results in Education
Systems in Eastern Europe and Central Asia.”
Washington, DC: World Bank.
Sophastienphong, K., Y. Mu, C. Saporito.
2008. “South Asian Bond Markets: Developing
Long-Term Finance for Growth.” Policy Research
Paper 45497, World Bank, Washington, DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 2

Svensson, L. E. 2010. “Inflation Targeting.”
NBER Working Paper Series 16654. National
Bureau of Economic Research, Cambridge, MA.

______. 2006. India: Building Capacity for
Public-Private Partnerships. Washington, DC:
World Bank.

Tewari, S. 2015. “75 Percent of Rural India
Survives on Rs 33 per Day.” India Today. http://indiatoday.intoday.in/story/india-rural-household650-millions-live-on-rs-33-perday/1/451076.html.

______. 2008. The Road Not Traveled: Education
Reform in the Middle East and Africa. Washington,
DC: World Bank.

Tokuoka, K. 2012. “Does the Business
Environment Affect Corporate Investment inIndia?” IMF Working Paper 12/70, International
Monetary Fund, Washington, DC.
UNCTAD (United Nations Conference on Tradeand Development). 2016. “Investor Nationality:
Policy Challenges.” World Investment Report2016. Geneva, Switzerland.
UNESCO(United Nations
Educational,
Scientific and Cultural Organization). 2014.
Higher Education in Asia: Expanding Out,
Expanding Up. Montreal: UNESCO Institute for
Statistics.
______. 2015. “Regional Overview: Central andEastern Europe and Central Asia.” In EFA Global
Monitoring Report 2015 Education for All 20002015. Paris, France: United Nations Educational,
Scientific, and Cultural Organization.
Uttama, N. P. 2016. “Spatial Estimation of the
Nexus between the PRC’s Foreign Direct
Investment and ASEAN’s Growth.” ADBI
Working Paper 597, Asian Development Bank
Institute, Tokyo.
Verne, P. 2016. “Subsidy Reforms in the Middle
East and North Africa Region: A Review.” Policy
Research Working Paper 7754, World Bank,
Washington, DC.
Winrow, G. 2015. “Realization of Turkey’s
Energy Aspirations. Pipe Dreams or Real
Projects?” Policy Paper. The Brookings Institution,
Washington, DC.
World Bank. 2000. Attracting Foreign Direct
Investment in Infrastructure: Why is it so
Difficult? Washington, DC: World Bank.

______. 2010. Global Economic Prospects 2010:
Crisis, Finance, and Growth. Washington, DC:
World Bank.
______. 2011. Learning for All: Investing in
People’s Knowledge and Skills to Promote
Development. Washington, DC: World Bank.
______. 2013a. China 2030: Building a Modern,Harmonious, and Creative Society. Washington,
DC: World Bank.
______. 2013b. The Africa Competitiveness Report2013. Washington, DC: World Bank.
______. 2014a. “Enhancing Competitiveness inan Uncertain World.” East Asia and Pacific
Economic Update. October issue. World Bank,
Washington, DC.
______. 2014b. “Back to Work. Growing with
Jobs in Europe and Central Asia.” Europe andCentral Asia Report Series, World Bank,
Washington, DC.
______. 2015a. “East Asia's Changing Urban
Landscape: Measuring a Decade of Spatial
Growth.” World Bank, Washington, DC.
______. 2015b. “Adjusting to a Changing
World.” East Asia and Pacific Economic Update.
April issue. World Bank, Washington, DC.
______. 2015c. Global Monitoring Report
2015/16: Development Goals in an Era of
Demographic Change. Washington, DC: WorldBank.
______. 2015d. “Low Commodity Prices andWeak Currencies.” ECA Economic Update(October issues). World Bank, Washington, DC.
______. 2015e. “Azerbaijan Systematic Country
Diagnostic.” World Bank, Washington, DC.

188

189

CHAPTER 2_____. 2015f. “Rebalancing Bosnia andHerzegovina: A Systematic Country Diagnostic.”
World Bank, Washington, DC.
_____. 2015g. “Bulgaria’s Potential for
Sustainable Growth and Shared Prosperity;
Systemic Country Diagnostic.” World Bank,
Washington, DC.
_____. 2015h. “Serbia Systematic Country
Diagnostic.” World Bank, Washington, DC.
_____. 2015i. “Bolivia Systematic Country
Diagnostic: Rebalancing Inclusive Growth toDeepen Gains on Poverty and Inequality
Reduction.” World Bank, Washington, DC.
_____. 2015j. “Colombia Systematic Country
Diagnostic.” World Bank, Washington, DC.
_____. 2015k. “Costa Rica’s Development: From
Good to Better. Systematic Country Diagnostic.”
World Bank, Washington, DC.
_____. 2015l.“El Salvador: Building on Strengths
for a New Generation; Systematic Country
Diagnostic.” World Bank, Washington, DC.
_____. 2015m. “Guatemala: Closing Gaps toGenerate More Inclusive Growth; SystematicCountry Diagnostic.” World Bank, Washington,
DC.
_____. 2015n. “Haiti: Toward a New Narrative;
Systematic Country Diagnostic.” World Bank,
Washington, DC.
_____. 2015o. “Honduras: Unlocking Economic
Potential
forGreater
Opportunities.”
Systematic Country Diagnostic. World Bank,
Washington, DC.
_____. 2015p. “Panama: Locking in Success.”
Systematic Country Diagnostic, World Bank,
Washington, DC.
_____. 2015q. “Uruguay: Systematic Country
Diagnostic.” World Bank, Washington, DC.
_____. 2015r. “Egypt: Promoting Poverty
Reduction and Shared Prosperity. A Systematic

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Country Diagnostic.” World Bank, Washington, DC.
______. 2015s. Global Economic Prospects: Having
Fiscal Space and Using It. Washington, DC: WorldBank.
______. 2015t. “Bangladesh: More and Better
Jobs to Accelerate Shared Growth and End
Extreme Poverty; A Systematic Country
Diagnostic. World Bank, Washington, DC.
______. 2015u. “Africa’s Pulse.” Volume 12,
October 2015. World Bank, Washington, DC.
______. 2016a. Global Economic Prospects:
Divergences and Risks. Washington, DC: WorldBank.
______. 2016b. “Reducing Vulnerabilities.” East
Asia and Pacific Economic Update. (Octoberissue). World Bank, Washington, DC.
______. 2016c. “Resilience through Reforms.”
Indonesia Economic Quarterly (June). World
Bank, Washington, DC.
______. 2016d. “Leveraging Trade Agreements.”
Malaysia Economic Monitor (June). World Bank,
Washington, DC.
______. 2016e. Global Economic Prospects:
Spillovers amid Weak Growth. Washington, DC:
World Bank.
______. 2016f. “Live Long and Prosper: Aging in
East Asia and Pacific.” World Bank East Asia andPacific Regional Report, World Bank,
Washington, DC.
______. 2016g. “The Russian Economy Inches
Forward: Will that Suffice to Turn the Tide?”
Russia Economic Report No. 36, World Bank,
Washington, DC.
______. 2016h. “Moldova: Paths to Sustained
Prosperity; A Systematic Country Diagnostic.”
World Bank, Washington, DC.
______. 2016i. The Big Switch in Latin America:
Restoring Growth through Trade. Washington, DC:
World Bank.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017_____. 2016j. Poverty and Shared Prosperity 2016:

Taking on Inequality. Washington, DC: WorldBank.
_____. 2016k. “Retaking the Path to Inclusion,
Growth and Sustainability; Brazil SystematicCountry Diagnostic.” World Bank, Washington,
DC.
_____. 2016l. The Commodity Cycle in Latin
America: Mirages and Dilemmas. Washington,
DC: World Bank.
_____. 2016m. “Belize: Systematic Country
Diagnostic.” World Bank, Washington, DC.
_____. 2016n. “The Economic Effects of War
and Peace.” MENA Quarterly Brief 6, World
Bank, Washington, DC.
_____. 2016o. “MENA Economic Monitor:
Economic and Social Inclusion to Prevent Violent
Extremism.” Working Paper 108525, World
Bank, Washington, DC.
_____. 2016p. Doing Business 2016: Measuring
Regulatory Quality and Efficiency. Washington,
DC: World Bank.
_____. 2016q. “Bangladesh Development
Update: Sustainable Development Progress.”
World Bank, Washington, DC.
_____. 2016r. “Sri Lanka Development Update.”
Fall. World Bank, Washington, DC.
World Bank. 2016s. “Program Document for a
Proposed Credit in the Amount of US$100
Million to Democratic Socialist Republic of Sri
Lanka for the Competitiveness, Transparency and
FiscalSustainability
Development
PolicyFinancing.” Report No. 106719-LK, World Bank,
Washington, DC.

CHAPTER 2_____. 2016v. India Development Update:Financing Double-Digit Growth. Washington, DC:
World Bank.
_____. 2016w. World Development Indicators.
Washington, DC: World Bank.
_____. 2016x. “Sri Lanka Systematic Country
Diagnostic: Ending Poverty and Promoting
Shared Prosperity.” World Bank, Washington,
DC.
_____. 2016y. “Africa’s Pulse.” Volume 14,
World Bank, Washington, DC.
_____. 2016z. “Africa Region: Sustaining Growthand Fighting Poverty amid Rising Global Risks.”
Regional Update 2016. World Bank, Washington,
DC.
_____. 2017. Doing Business 2017: Equal
Opportunity for All. Washington DC: WorldBank.
World Bank and Development Research Center of
the State Council, the People’s Republic of China.
2014. Urban China: Toward Efficient, Inclusive,
and Sustainable Urbanization. Washington, DC:
World Bank.
World Bank and Ministry of Planning andInvestment of Vietnam. 2016. Vietnam 2035:
Toward Prosperity, Creativity, Equity, and
Democracy. Washington, DC: World Bank.
World Economic Forum. 2015. The Global
Competitiveness Report 2015-16. Geneva: World
Economic Forum.
_____. 2016. The Global Competitiveness Report
2016-17. Geneva: World Economic Forum.

_____. 2016t. “Commodity Markets Outlook:
OPEC in Historical Context.” October. World
Bank, Washington, DC.

Zhai, F., and P. Morgan. 2016. “Impact of thePeople’s Republic of China’s Growth Slowdown
on Emerging Asia: A General Equilibrium
Analysis.” ADBI Working Paper 560. AsianDevelopment Bank Institute, Tokyo.

_____. 2016u. South Asia Economic Focus:
Investment Reality Check. Washington, DC:
World Bank.

Zhang, L. 2016. “Rebalancing in China—Progress
and Prospects.” Working Paper 16/183.
International Monetary Fund, Washington, DC.

190

CHAPTER 3

WEAK INVESTMENT IN
UNCERTAIN TIMES:
Causes, Implications, and Policy Responses

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

Investment growth in emerging market and developing economies (EMDEs) has slowed sharply since 2010.
This deceleration has been most pronounced in the largest emerging markets and commodity-exporting EMDEs,
but has now spread to the majority of these economies: investment growth is below its long-term average in themost EMDEs over the past quarter century except during serious global downturns. These economies account for
more than one-third of global GDP and about three-quarters of the world’s population and the world’s poor.
While slowing investment growth is partly a correction from high pre-crisis growth rates in some EMDEs, it also
reflects a range of obstacles holding back investment: terms-of-trade shocks (for oil exporters), slowing foreign
direct investment inflows (for commodity importers), as well as private debt burdens and political risk (for all
EMDEs). Weak investment is a significant challenge for EMDEs in light of their sizable investment needs tomake room for expanding economic activity, to accommodate rapid urbanization, and to achieve sustainable
development goals. Sluggish investment also sets back future growth prospects by slowing the accumulation ofcapital and productivity growth. Although policy priorities depend on country circumstances, including theavailability of policy space and economic slack, policymakers should be ready to employ the full range of cyclicaland structural policies to accelerate investment growth.

Introduction
Investment growth in emerging market anddeveloping economies (EMDEs) has slowed
sharply since 2010, declining from 10 percent, on
average, in 2010 to 3.4 percent in 2015.1 It has
likely decelerated by more than half a percentage
point in 2016. Investment growth is now not only
well below its pre-crisis average, but also below its
long-term average in the highest share of EMDEs
in 25 years with the exception of during serious
global downturns. EMDEs with below long-term
average investment growth account for 35 percent
of global GDP and contain 71 percent of theworld’s population and 73 percent of the world’s
poor. Moreover, expectations for long-term
investment growth in EMDEs have been revised
down significantly, partly because the slowdown
in investment has been highly synchronous andprotracted among these economies.
Note: This chapter was prepared by M. Ayhan Kose, Franziska
Ohnsorge, Lei Sandy Ye, and Ergys Islamaj, with contributions from
Jongrim Ha, Raju Huidrom, Csilla Lakatos, Hideaki Matsuoka,
Trang Nguyen, Yoki Okawa, Naotaka Sugawara, Congyan Tan,
Ekaterine Vashakmadze, and Shu Yu. Mai Anh Bui, Collette
Wheeler, Yirou Li, Liwei Liu, and Cristhian Vera Avellan provided
research assistance.
1Throughout this chapter, unless otherwise specified, investment
refers to real gross fixed capital formation (public and private
combined). For the sake of brevity, “investment” is understood toindicate investment levels. Investment growth is measured as theannual percent change in real investment. The long-term averagerefers to the average of available data for 1990-2008, the pre-crisis
average to the average during 2003-08.

Recent investment weakness in EMDEs has
followed the significant slowdown in investment
growth in advanced economies (AEs) in theimmediate aftermath of the global financial crisis.
However, post-crisis investment weakness has
different features in EMDEs than in AEs. In AEs,
investment contracted sharply during the global
financial crisis and, in the Euro Area, during thesubsequent debt crisis. Investment in AEs
recovered somewhat in 2014-16, but at a slower
pace than in recoveries following earlier global
downturns. In contrast, in EMDEs, investment
continued growing through the global financial
crisis and its immediate aftermath, but thisexpansion has slowed since 2010. World
investment growth has also gradually lost steam
over the past six years.
The slowdown in investment growth is occurring
despite large unmet investment needs in many
EMDEs. EMDEs’ infrastructure, education, andhealth systems are struggling to keep pace with
rapid urbanization, economic activity, andchanging demands on workforces. Commodityexporting EMDEs require investment to shift
away from natural resource-based sectors toward
other engines of growth. Vigorous private
investment could give momentum to slowing
productivity growth.
More generally, investment is critical to sustaining
long-term growth. Capital accumulation raises

193

194

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.1 Investment growth slowdown
Investment growth in EMDEs has slowed sharply since the global financial
crisis. In 2015, the share of EMDEs with investment growth below its longterm average reached its highest level excepting global downturns. Longterm forecasts suggest continued weakness in investment growth. The
investment growth differential between EMDEs and AEs has narrowed.
A. Investment growth

Percent

B. Share of EMDEs with investment
growth below its long-term average

This chapter examines the recent weakness in
EMDE investment, its underlying drivers, andpossible policy responses to revive investment
growth. In particular, it addresses the following
questions:

Percent of EMDEs
100

1990-2008 average

12
2003-08 average

80

8

60
4

prominently in recent policy and academic
debates, slowing investment growth in EMDEs
has received less attention.2 Yet, EMDEs
constituted about 45 percent of world investment
and two-thirds of world investment growth during
2010-2015 (Figure 3.1).

40
20

C. Catch-up to U.S. per capita income
1993-2008
2003-08
2013-15

Number of years
120
100

D. Five-year-ahead forecasts ofinvestment growth
Percent
10

60

6

40

4

20

What are the main features of the investment
slowdown?

•

What is the macroeconomic backdrop to
slowing investment growth in EMDEs?

•

What are the factors associated with theinvestment slowdown, including spillovers
from weak activity and investment in major
economies?

•

What are the implications of weak investment
growth for long-term growth prospects?

•

Which policies can support investment?

EMDEs AEs World

8

80

•
2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

World

1994

2010
2011
2012
2013
2014
2015

AEs

1992

2010
2011
2012
2013
2014
2015

EMDEs

0

1990

2010
2011
2012
2013
2014
2015

0

2

0

E. Difference between investment
growth in EMDEs and AEs

F. Share of world investment

Percentage points
20

Percent
50

15
10

2016

2015

2014

2013

0

2012

EMDE
commodity
importers

2011

EMDE
commodity
exporters

2010

EMDEs

EMDEs excluding BRICS
Other BRICS
China

40

5

30

0

The chapter informs the debate on the recent
slowdown in investment by making the following
contributions:

20

-5
-10

10

•

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

-15
0
1993-1999

2000-08

2010-15

Sources: Consensus Economics; Haver Analytics; International Monetary Fund; Oxford Economics;
World Development Indicators, World Bank.
A. Weighted averages. Long-term average starts in 1991 for EMDEs due to lack of earlier data.
B. Long-term averages are country-specific and refer to 1990-2008. Latest year is 2015.
C. Number of years needed to catch-up with 2015 real per capita GDP level in the United States,
assuming average growth rates over each period denoted for each group.
D. Each line shows five-year-ahead Consensus Forecasts as of the latest available month in the year
denoted. Unweighted averages of 21 EMDEs and 25 advanced economies. World sample includes 46
countries. Last observation is for October 2016.
E. The sample includes 100 EMDEs and 34 AEs. Difference between EMDEs’ and AEs’ weighted
average investment growth rates.
F. Each column shows the period average of the share of global investment contributed by each
respective group denoted. The world sample includes 100 EMDEs and 34 AEs.

labor productivity, a key driver of the long-term
growth of real wages and household incomes, notonly by capital-deepening—equipping workers
with more capital—but often also by embodying
productivity-enhancing technological advances.
While feeble investment in AEs has featured

EMDE focus and regional perspectives. The
chapter focuses on EMDEs, whereas the bulkof the existing literature has focused on AEs.
The few existing studies that analyze EMDE
investment are either based on pre-crisis dataor confine their analysis narrowly to the 200809 crisis or simply focus on specific regions.3
The analysis in this chapter is accompanied byan in-depth discussion of regional perspectives

2Post-crisis investment weakness in advanced economies has been
explored in Banerjee, Kearns, and Lombardi (2015); IMF (2015a);
Leboeuf and Fay (2016); and Ollivaud, Guillmette, and Turner(2016).
3These include Anand and Tulin (2014); Caselli, Pagano, andSchivardi (2003); Qureshi, Diaz-Sanchez, and Varoudakis (2015);
Bahal, Raissi, and Tulin (2015); and Cerra et al. (2016). Firm-levelstudies include Magud and Sosa (2015) and Li, Magud, and Valencia(2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

on investment weakness (see Boxes 2.1.12.6.1 in Chapter 2).
•

Comprehensive set of factors. It estimates thecontributions of a comprehensive set of factors
associated with weak investment growth. A
number of empirical methods are used tozoom in on specific external and domestic
factors.

•

Long-term implications. It examines theimplications of investment weakness in
EMDEs for global trade, long-term prospects
for growth and catch-up, and it highlights thepotential impact on productivity growth.

•

Policy implications. In light of its findings andinsights from an extensive literature, thechapter provides a wide range of macro- andmicroeconomic policy recommendations torevive investment growth.

The chapter’s main findings are as follows.
Investment growth slowdown. While broadbased, the investment slump in EMDEs has been
most pronounced in the BRICS countries (Brazil,
Russia, India, China, and South Africa),
commodity-exporting EMDEs, and in regionswith a larger number of commodity exporters.
China accounted for about one-third of theinvestment growth slowdown in EMDEs since2010, and Brazil and Russia together for onethird. Surveys of long-term forecasts suggest thatinvestment weakness is expected to persist.
Factors associated with the slowdown. Whereas
investment weakness in AEs mainly reflected
anemic output growth, investment weakness in
EMDEs has had a range of sources.
•

In commodity importers, slowing FDI inflows
and spillovers from soft activity in majoradvanced economies accounted for much of
the slowdown in investment growth since
2011.

•

In commodity exporters, a sharp deteriorationin their terms of trade (for energy exporters),
slowing growth in China, and mounting
private debt burdens accounted for much of
the slowdown in investment growth.

CHAPTER 3

In several EMDEs, political and policy uncertainty
has been a key factor associated with investment
contractions or slowdowns.
Spillovers. Over the past five years, AE growth has
repeatedly fallen short of expectations partly
because of crisis legacies. Sub-par growth andgrowth prospects in AE trading partners andsource countries for FDI into EMDEs have slowed
EMDE output growth. For every 1 percentage
point lower output growth in the United States orEuro Area, EMDE output growth fell 0.8-1.3
percentage points within a year. Perhaps inrecognition of prospects for a weaker external
environment,
EMDE
investment
growthresponded about twice as strongly as EMDE
output to declines in U.S. and Euro Area growth.
Sluggish economic activity in major AEs has
coincided with a policy-driven slowdown ininvestment growth in China (Hong et al. 2016).
This has contributed to weakening global
commodity prices and has weighed on growth inother EMDEs through inter-sectoral input-output
links and, indirectly, via output growth spillovers.
A 1 percentage point decline in China’s output
growth is associated with a decline in output
growth within a year of 0.5 percentage point (incommodity importers) to 1.0 percentage point (incommodity exporters). In addition to the overall
output growth slowdown in China, a rebalancing
of growth away from trade-intensive investment
towards less trade-intensive sources of growth has
generated adverse spillovers to other EMDEs,
especially for commodity exporters.
“Investment-less” credit booms. Investment
weakness has been set against the backdrop of
exceptionally benign domestic (and global)
financing conditions until late 2016. Policy
interest rates of AE central banks are at or nearrecord lows and, in several instances, negative(Arteta et al. 2016; World Bank 2016a). Private
credit growth in about 30 EMDEs was near or
above levels associated with credit booms at somepoint during 2010-15. Historically, around 40
percent of credit booms have coincided withinvestment surges. However, similar credit booms
since 2010 have taken place with virtually no suchinvestment surges but, instead, often with rapidly
rising consumption.

195

196

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.2 Investment growth slowdown:Group-specific and regional dimensions
The slowdown in EMDE investment growth has been pronounced andpersistent among BRICS, commodity exporters, and many commodity
importers. It has been concentrated in EMDE regions with predominantly
commodity-exporting countries, in Europe and Central Asia, Latin America
and Caribbean, and Middle East and North Africa.
A. Investment growth

2010
2011
2012
2013
2014
2015

AEs

World

C. Quarterly investment growth:
EMDEs
Year-on-year, percent
15

2010
2011
2012
2013
2014
2015

2010
2011
2012
2013
2014
2015

BRICS

2010
2011
2012
2013
2014
2015

2010
2011
2012
2013
2014
2015

EMDEs

1990-2008 average
2003-2008 average

2010
2011
2012
2013
2014
2015

2010
2011
2012
2013
2014
2015

2003-2008 average

2010
2011
2012
2013
2014
2015

Percent
14
12
10
8
6
4
2
0

1990-2008 average

Percent
14
12
10
8
6
4
2
0

B. Investment growth (cont.)

EMDE com.
EMDE com. Large importers
Other
exp. ex BRICS imp. ex BRICS
ex BRICS
importers ex
BRICS

D. Contributions to EMDE investment
growthEMDEs
1990-2008 average
2003-08 average

10

Percentage points

Other EMDEs

12

Brazil, Russia, S. Africa

10

India

8

China

6
5

4
2
0

2016Q1

2015Q1

2014Q1

2013Q1

2012Q1

2011Q1

2010Q10

E. Regional dimensions
Percent
15

-2
2010

1990-2008 average
2003-08 average

Percent
12

2013

2014

2015

0

Europe and Latin America
Central Asia
andCaribbean

Middle Eastand North
AfricaSouth Asia

Sub-SaharanAfrica

2010
2011
2012
2013
2014
2015

2010
2011
2012
2013
2014
2015

0

2010
2011
2012
2013
2014
2015

4

2010
2011
2012
2013
2014
2015

5

1990-2008 average
2003-08 average

2010
2011
2012
2013
2014
2015

8

2010
2011
2012
2013
2014
2015

2012

F. Regional dimensions (cont.)

10

East Asia andPacific

2011

Sources: Haver Analytics; International Monetary Fund; Oxford Economics; World Development
Indicators, World Bank.
A.B. Weighted averages. Long-term average starts in 1991 for EMDEs due to lack of earlier data.
The EMDE sample includes 126 economies. “ex BRICS” excludes BRICS economies within eachgroup. Large importers refer to the seven EMDE commodity importers ranked in the top 20 EMDEs(ex BRICS) in nominal GDP terms. Other importers include 42 economies.
C. Weighted averages. Includes 28 EMDEs with available quarterly data. Long-term averages start in1991 for EMDEs and are based on annual data. Last observation is for Q2 2016.
D. Percentage point contribution by each country group to EMDE investment growth.
E.F. Medians across EMDEs of each region to ensure broad-based representation. Long-term
averages are period averages of annual medians. East Asia and Pacific, Europe and Central Asia,
Latin America and Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa
include 8, 12, 18, 10, 5, and 26 economies, respectively.

Long-term implications of weak investment
growth. By slowing capital accumulation andtechnological progress embedded in investment,
weak post-crisis investment growth has reduced
potential output growth relative to pre-crisis rates.
This slowdown in potential growth could be

intensified if weakness in investment also sets backtotal factor productivity growth through aslowdown in embodied technological progress.
Policy responses. Policymakers can boost
investment both directly, through public
investment, and indirectly, by encouraging private
investment, including foreign direct investment(FDI), and by undertaking measures to improveoverall growth prospects and the business climate.
Doing so directly through expanding public
investment in infrastructure and human capital(especially education and health) would help raise
demand in the short-run, increase potential output
in the long-run and improve the environment for
private investment and trade. Public investment
would also help close investment gaps targeted by
the United Nations Sustainable Development
Goals, which have been estimated at up to 3
percent of global GDP per year.
More effective use of counter-cyclical fiscal andmonetary policies can also promote private
investment indirectly by strengthening output
growth, especially in commodity-exporting
EMDEs. These policies may be less effective,
however, if employed to mitigate the impact of apersistent terms of trade shock. Also, there may belittle scope for increased public investment or
expansionary fiscal policy, if there is limited fiscal
space. In any event, to raise investment growthsustainably, such policies will need to be
buttressed by structural reforms to encourage both
domestic private and foreign direct investment.
Historically, reform waves in EMDEs have been
associated with higher investment and output
growth. Policy frameworks committed to reform,
such as expansion of cross-border trade flows, canhelp lift investment by boosting confidence ingrowth prospects—not least via attracting FDI.

Main features of theinvestment slowdown
During 2003-08, EMDE investment growthreached historic highs averaging 12 percent a year,
more than twice the long-term average growth rateof 5 percent (Figure 3.2). The investment boom
was particularly pronounced in commodity

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

After an unusually strong rebound in 2010, investment growth in EMDE
commodity exporters in 2014-15 slowed well below the average growth
rates after previous global downturns. In EMDE commodity importers,
investment growth has been consistently more anemic than after previous
global downturns.
A. Advanced economies

B. EMDE commodity exporters

Percent
10

Percent
16
14
12
10
8
6
4
2
0
-2

Average

0
-5
-10
-15
-2

1

2
3
Year

4

5

6

-1

Percent
16

Percent
16

Average

2009

12

12

8

8

4

4

0

0

-4

-4

-8
-1

0

1

2
3
Year

4

5

6

0

1

2009

2
3
Year

4

Average

2009

1

4

5

6

-8
-2

-1

0

2
3
Year

5

6

Sources: Haver Analytics, International Monetary Fund, Oxford Economics, World Bank.
Notes: Unweighted average investment growth. The horizontal axis denotes years. Zero refers to theyear of the start of global downturns, which include global recessions and slowdowns. Average refers
to unweighted average investment growth during global recessions and slowdowns of 1975, 1982,
1991, 1998, and 2001.

FIGURE 3.4 Economies with investment growing below
its long-term average
The share of EMDEs with investment growth below its long-term average
has risen since 2012. The increase has been especially pronounced forcommodity exporters.
A. EMDEs with investment growth
below long-term average

B. All economies and advanced
economies with investment growth
below long-term average

Percent of countries
100
Commodity exporters
Commodity importers
80
Share = 50

Percent of countries
100
AEs World

60

60

40

40

20

20

0

0

Share = 50

2015

2014

2013

2012

2011

2010

2015

80

2014

2013

Different between commodity exporters andimporters. The slowdown in EMDE investment
growth has been most pronounced among the
BRICS and commodity-exporting economies. By
2015, investment growth had dropped to 3.7
percent in the BRICS and to 1.6 percent in nonBRICS commodity-exporting EMDEs from about
13 percent and 7 percent, respectively, in 2010.

0

D. World

2010

Broad-based. In 2015, investment growth was
below its long-term average in more than 60
percent of EMDEs, the largest share over the pastquarter-century outside serious global downturns(Figure 3.4). In the majority of EMDEs,
investment growth has slowed in at least two outof three years during 2013-15.

-1

Average

C. EMDE commodity importers-2

Unusually weak. Investment growth remains
more anemic—and its weakness has been more
persistent—than in the aftermath of previous
global recessions and slowdowns (Figure 3.3).
From an unusually strong rebound in 2010,
investment growth in EMDE commodity
exporters has now slowed well below growth rates
observed after previous global recessions andslowdowns.

2009

5

2012

The investment slowdown has been broad-based.
It has been more sustained in EMDEs than in AEs
and more pronounced than in periods following
earlier global downturns. The slowdown has beenvisible in both private and public components ofinvestment. Repeated downgrades to consensus
forecasts for investment growth suggest a gradualrecognition of its likely persistence.

FIGURE 3.3 Investment growth after global downturns

2011

exporters, where soaring commodity prices
encouraged investment in resource explorationand development and, in anticipation of higher
future incomes, in non-resource projects (WorldBank 2016a). Some of this elevated pre-crisis
investment fueled activity in nontradables sectors(e.g., real estate) or in sectors whose growthprospects have dimmed considerably (e.g.,
mining). Since 2010, however, EMDE investment
growth has slowed steadily from 10 percent in2010 to 3.4 percent in 2015. By 2014, it was not
only well below its double-digit pre-crisis average
rates but also below its long-term average over
1990-2008.

197

CHAPTER 3

Sources: Haver Analytics; International Monetary Fund; Oxford Economics; World Development
Indicators, World Bank.
A.B. Long-term averages are country-specific and refer to the period 1990-2008. The world sample
includes 157 economies. The AE sample includes 35 economies, and the EMDE sample includes 78
commodity exporters and 44 commodity importers.

198

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.5 Investment growth forecasts

regions with a large number of commodityexporting economies (Boxes 2.1.1-2.6.1 in
Chapter 2). This includes Europe and Central
Asia (ECA), where investment growth has beenanemic from 2012-2015, Middle East and North
Africa (MNA), and Latin America and the
Caribbean (LAC), where investment hascontracted in several large countries.

Short-term and long-term forecasts for investment growth in EMDEs havedeclined steadily since 2010.
A. Next-year forecasts in EMDEs

B. Forecasts: Five-year ahead
expectations

Percent

Percent
GDP

12

Investment

EMDEs
EMDE commodity importers
EMDE commodity exporters

8

EMDEs: 2015 actual
6
8
4
4
2

2016

2015

2014

2013

2012

2011

2010

2016

2015

2014

2013

2012

2011

2010

2009

0

2008

0

Source: Consensus Economics.
A. Next-year monthly Consensus Forecasts of investment and output growth. Unweighted averages
across 18 EMDEs. Latest observation is October 2016.
B. Each column shows five-year-ahead Consensus Forecasts as of the latest available month in theyear denoted. Unweighted averages among 11 EMDE commodity importers and 10 EMDE
commodity exporters. Diamond denotes average actual investment growth in 2015 for 21 EMDEs.
Last observation is for October 2016.

FIGURE 3.6 Global financial conditions and activity
Global financing conditions have been exceptionally benign from 2010
until late 2016, with policy rates in EMDEs and AEs at historic lows.
Since 2010, output growth has slowed sharply in EMDEs and has been
mediocre in AEs.
A. Monetary policy rates

B. Output growth

Percent

Percent

1990-2008 average

8

2003-08 average

40

EMDE commodity exporters
EMDE commodity importers
Advanced economies

Although investment growth in commodityimporting EMDEs (excluding China and India)
has been resilient as a group, this resilience has
been mainly driven by a few large commodity
importers. Among smaller commodity importers(those not part of the largest twenty EMDEs innominal GDP terms), investment growth has
stagnated over the post-crisis period.
Different from advanced economies. The
sustained investment growth slowdown in
EMDEs contrasts with the partial recovery in AE
investment growth since the global financial crisis.
Investment growth in AEs averaged 2.1 percent
over 2010-15. By 2014, it had reattained its longterm average growth rate, with investment growth
not far below pre-crisis rates. The share of AEs
investing below their long-term average rates
declined from more than 80 percent in 2013 toabout 60 percent in 2015.

6
30

EMDEs

AEs

2016

2014

2012

2010

2016

2014

2012

2010

0
1980 1986 1992 1998 2004 2010 2016

2016

0

2014

10

2012

2

2010

4
20

World

Sources: Haver Analytics, World Bank.
A. Medians for available data for 69 EMDEs and 26 AEs. Last observation is for November 2016.
B. Weighted averages.

China accounted for about one-third of theinvestment growth slowdown in EMDEs between
2010 and 2015, and Brazil and Russia for anotherone-third.
In commodity exporters, investment weakness
affected all types of investment (machinery andequipment as well as construction) and all sourcesof investment (public and private). Reflecting thedivergence between commodity exporters andimporters, the EMDE investment growth
slowdown has been concentrated in EMDE

Weak public and private investment. During
2010-15, private investment accounted forroughly 70 percent of total EMDE investment on
average. The coordinated fiscal stimulus of 200809 lifted public investment growth above longterm averages in both AEs and EMDEs. In AEs,
this boost was subsequently reversed. In EMDEs,
public investment growth has remained positive
but weaker during 2010-13 and, from 2014-15,
dropped to below its long-term average, as
discussed in detail later in the chapter. Since thepost-crisis rebound of 2010, private investment
growth slowed in synch with public investment
growth. In more than half of all EMDEs, private
investment growth remained below the long-term
average during 2010-15.
Expected to persist. EMDE investment growth
has consistently fallen short of expectations(Figure 3.5). While 2010 consensus forecasts

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

expected investment growth for EMDEs to reach
7 percent in 2015, the outturn was 0.9 percent.
Both short-term forecasts and long-term
expectations for investment growth in EMDEs
have declined since 2010. This may partly reflect a
recognition that the investment slowdown isreturning growth to long-term average rates fromrecord-high pre-crisis rates. However, the depth
and reach of the weakness in investment suggestthat the recent slowdown could be more than asimple reversion to the long-term trends. The
downward revisions have been considerably more
pronounced than those for real GDP growth. In
AEs, long-term expectations about investment
growth have been more steady, with a decline ofjust 1 percentage point over 2010-15.

Macroeconomic backdrop
Before delving into the main obstacles associatedwith the slowdown in investment in EMDEs, it isuseful to consider the macroeconomic backdrop,
shaped by a wide range of competing factors.
Globally, borrowing costs have been at record lows
and financial market liquidity has been ample
since the financial crisis (Figure 3.6). In several
EMDEs, domestic private credit to thenonfinancial private sector surged. However,multiple headwinds have offset the tailwinds toinvestment from historically low financing cost
until late 2016. The headwinds have included
disappointing activity and weak growth prospects,
severe adverse terms of trade shocks forcommodity exporters, easing and volatile capital
flows, bouts of policy uncertainty in major
economies, and rapid accumulation of private
debt.
Weak activity. EMDE output growth has slowed
sharply post-crisis, from 6.4 percent in 2011 to
3.5 percent in 2015, well below its pre-crisis
average of 7 percent (Figure 3.6). To the extent
that growth weakness is structural, investment
weakness may be expected to persist (Didier et al.
2015). About one-third of the growth slowdown
in EMDEs has been estimated to reflect structuralcauses. While the sources of the growth slowdown
have varied across EMDEs, these have included a
new era of lower commodity prices, spillovers
from soft activity in major economies, weakening

CHAPTER 3

productivity growth, and a maturing of supply
chains that has slowed global trade growth.
In major economies, activity has been soft postcrisis despite unprecedented monetary policy
action. The Euro Area crisis was accompanied by arecession in 2012-13 that hurt trading partners,
especially in Eastern Europe and North Africa.
Euro Area growth prospects have continued tobe subdued as crisis legacies have unwound. A
series of one-off events, such as the debt ceilingdebate in the U.S., caused disappointing growth
outcomes. A secular decline in productivity
growth has also reduced growth prospects in the
United States. Growth in Japan has fluctuatedaround zero as a result of one-off events (e.g.,major earthquakes in 2011 and 2016), earlier than
expected policy tightening (VAT hike in 2014),
long-term population pressures, and a slow pace ofstructural reforms. Weak growth prospects acrossadvanced economies have raised the possibility of
secular stagnation and a protracted period of
extremely low long-run equilibrium interest rates
that restrict monetary policy options (Summers
2014; Teulings and Baldwin 2014). In China,
growth has slowed gradually towards moresustainable levels, with a rebalancing frommanufacturing to services. This healthy transition
has reduced commodity demand, with adverse
spillovers to commodity-exporting EMDEs(World Bank 2016a).
Adverse terms of trade shocks. About two-thirdsof EMDEs are reliant on exports of energy, metals,
or agricultural commodities. Most commodity
prices have fallen sharply from their early-2011
peaks—with metals and energy prices plunging by
more than 40 percent (Figure 3.7). As a result, theterms of trade of commodity exporters havedeteriorated by 4 percent since 2011, and those ofoil exporters by 21 percent.
Subdued and volatile capital flows. FDI has
been an important source of investment in
EMDEs. FDI inflows to EMDEs have more thantripled since 2000 and accounted for about onethird of global FDI inflows in 2015. On averageamong EMDEs, gross FDI inflows amounted to 3
percent of GDP and 20 percent of domestic
investment in 2015. Since 2010, however, growth

199

200

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.7 Terms of trade and investment growth
The terms of trade of commodity exporters have deteriorated since 2011,reflecting the 30-60 percent declines in global energy, metals, andagricultural commodity prices from their early-2011 peaks. EMDEs withlarger declines in their terms of trade experienced lower investment growthover 2010-15.
A. Cumulative change in commodity
pricesPercent
20

B. Investment growth in EMDEs withhigh and low changes in terms oftrade, 2010-15

2011Q1-2014Q2

Percent

2014Q2-2016Q3

8

0
6

-20
-40

4

-60

2

-80
EnergyAgriculture

Metals &minerals

0
Low

High

Source: World Bank.
A. Energy index includes crude oil (85 percent weight), coal, and natural gas. Agriculture index
includes 21 agricultural commodities. Metals and minerals index includes 6 metals traded on the Land
& Metal Exchange, plus iron ore.
B. “Low” and “High” indicates annual terms of trade growth in the bottom and top one-thirds of the
distribution, respectively. Difference in medians between “high” and “low” subsamples is significant at
the five percent level. Group medians for 108 EMDEs during 2010-15.

FIGURE 3.8 FDI flows and investment growth
Since 2010, weak investment growth has partly reflected shrinking FDI
inflows among both EMDE commodity importers and exporters.
A. FDI inflows to GDP in EMDEs

Percent of GDP
6

Commodity importers
Commodity exporters

B. Investment growth in EMDEs withhigh and low FDI inflows, 2010-15
Percent
7
6

4

5
4

2

3
2

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

0

1
0
Low

High

Sources: International Monetary Fund, World Bank.
A. Gross FDI inflows as ratios to GDP. Weighted averages. Includes 75 EMDEs.
B. “Low” and “High” indicate annual change in the FDI to GDP ratio in the bottom and top one-thirdsof the distribution, respectively. Difference in medians between “high” and “low” subsamples issignificant at the five percent level. Group medians for 120 EMDEs during 2010-15.

in FDI inflows to EMDEs has slowed, partly as aresult of weak activity in AEs (Figure 3.8). NonFDI inflows have been more resilient—butnotably volatile—reflecting investors’ search foryield amid low AE interest rates, with a shift awayfrom bank flows to non-bank flows (McQuade
and Schmitz 2016).

Heightened uncertainty. Political uncertainty has
increased in many EMDEs since the 2008-09
global financial crisis (Figure 3.9). This has
reflected geopolitical tensions in Eastern Europe,
security challenges and conflicts in the Middle
East, and acute domestic political tensions inseveral large EMDEs. Even in major AEs and
EMDEs without significant political tensions,major policy shifts have often been accompaniedby policy uncertainty. For example, bouts ofpolicy uncertainty—e.g., government shutdowns
and political stalemates in the United States, theTaper tantrum episode associated with the U.S.
Federal Reserve Bank’s policy plans, concerns
around the future of the Euro Area during theEuro Area crisis, the U.K. referendum vote toleave the European Union (EU), and reforms
related to financial markets and currency regime
in China—have been a source of global financial
market volatility further weighing on investor
sentiment.
Rapid credit growth and debt overhang. On
average, private credit in both commodity
exporters and importers has increased by near 20
percentage points of GDP from 2000 to 2015
(Figure 3.10). The share of EMDEs with private
credit-to-GDP ratios exceeding 60 percent hadreached about one-fifth by 2015, the highest sharesince 1990. Historically, during the three decades
prior to the 2008-09 crisis, about 40 percent of allcredit booms have overlapped with investment
surges within one or two years. Credit booms
since 2010, however, have been unusually“investment-less”: virtually none of the post-crisis
credit booms in EMDEs have been accompanied
by investment surges. In several countries, rapid
credit growth instead fueled above-average
consumption growth. In the past, when suchinvestment-less credit booms unwound, output
contracted more than when the credit boom had
been accompanied by an investment surge.

Factors associated with theinvestment slowdown
A series of econometric exercises is conducted toestimate the relative importance of these externaland domestic factors to investment growth. First,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Second, the analysis drills down into the shortterm effects of uncertainty and weak activity inmajor advanced economies on EMDE investment
growth using time-series methods. This is done in
two sets of vector autoregressions tailored to
examine each factor in detail. The need forquarterly data restricts the cross-country
dimension of the sample (to 18 EMDEs) used inthese exercises.
Medium-term correlates of EMDE
investment growth
Figure 3.11 summarizes the estimated effects ofthese variables on investment growth. Details of
the panel regression model used to derive theseresults are presented in Annex 3.1 (Annex Tables
3.1.1 and 3.1.2).

201

FIGURE 3.9 Political stability and investment growth
Weak investment growth compared to pre-crisis rates partly reflects
reduced political stability since the global financial crisis.
A. Political stability in EMDEs

Index
68

Commodity importers
Commodity exporters

64

B. Investment growth in EMDEs withstrong and weak improvement inpolitical stability, 2010-15
Percent
6

4

60
2
56

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

in a panel regression, investment in 73 EMDEs
and 26 AEs for 1998-2015 is modelled following
the standard framework implying that the level ofinvestment is chosen such that the marginal returnon capital matches the risk-adjusted cost of capital.
Specifically, the regression model includes as
explanatory variables the proxies for the drivers ofinvestment, including the marginal return tocapital (e.g., output growth and terms of trade
growth) and the risk-adjusted cost of capital (e.g.,measures of uncertainty, FDI inflows, and theprivate credit-to-GDP ratio).4 These also are thefactors that have shaped the macroeconomic
backdrop as previously discussed.

CHAPTER 3

0
Weak improvement

Strong improvement

Sources: Political Risk Services International Country Risk Guide (ICRG).
A. Lines show unweighted annual average, as measured by the ICRG index, for each group. A
decrease in the index denotes deteriorating political stability. Includes 95 EMDEs.
B. “Strong improvement” and “Weak improvement” indicate improvement in political stability from2010-15 in the top and bottom one third of the distribution, respectively. Difference in medians
between “strong improvement” and “weak improvement” subsamples is significant at the ten percent
level. Group medians for 61 EMDEs during 2010-15.

FIGURE 3.10 Private debt and investment growth
Domestic private debt has risen sharply in EMDEs since the global
financial crisis. EMDEs with larger private debt experienced slower
investment growth during 2010-15.
A. Private debt in EMDEs

Percent of GDP
60

B. Investment growth in EMDEs withhigh and low private debt-to-GDP
ratios, 2010-15
Percent
7
6
5

40

4
3

20
Commodity importers
Commodity exporters

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

0

2
1
0

Whereas investment weakness in AEs has mainlyreflected sluggish output, investment weakness
in EMDEs has been associated with a wider
number of factors.5 While slowing output growth
can account for three-quarters, on average, forSource: World Bank.
Notes: Private debt refers to domestic credit to private sector by banks as percent of GDP.
A. Unweighted averages. Includes 115 EMDEs.
B. “Low” and “High” indicate median credit-to-GDP ratios over 2010-15 in the bottom and top onethirds of the distribution, respectively. Difference in medians between “high” and “low” subsamples issignificant at the five percent level. Group medians for 107 EMDEs during 2010-15.

4A large cross-country dataset for investment growth is only
available for aggregate gross fixed capital formation, which includes
both private and public investment. The correlates of investment
modelled here are mainly those relating to private investment whereas
public investment is assumed to be mostly subject to discretionary
policy decisions. In EMDEs, private investment on average
constitutes about 70 percent of total investment. To mitigate
concerns about endogeneity, output growth prospects are proxied bylagged output growth, in line with other studies (see Annex 3.1).
5The predominant role of output weakness for AEs was also notedby G20 (2016a) and IMF (2015a).

slowdowns in investment growth among AEs
during 2011-15, it accounted for a small share of
the investment growth slowdown in the average
EMDE. More important were terms-of-trade
shocks (for oil exporters), and slowing FDI inflows(for commodity importers) as well as private debt
burdens and political risk (for all groups of
EMDEs).

Low

High

202

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017of private sector debt has increasingly heldback investment growth.

FIGURE 3.11 Correlates of investment growth
Slowing output growth, declining FDI inflows, and worsening terms oftrade (for commodity exporters) are associated with lower investment
growth in EMDEs. Rising private debt and deteriorating political stability
are additional headwinds for many EMDEs.

Variable•

EffectReal GDP growth+

Increase in FDI inflows+

Political stability+

Private debt…

Private debt squared—

Terms of trade improvement+

Reform spurt+

Source: World Bank.
Notes: Estimated impact of explanatory variables on investment growth in 73 EMDEs during 19982015, based on a panel regression with country fixed effects. The explanatory variables denoted withplus/minus signs are significant at the five percent level. Details are discussed in Annex 3.1.

•

In oil exporters, on average, the terms-of-trade
shock caused by the oil price decline from2014 onwards accounted for about one-half of
the investment growth slowdown.

•

In commodity importers, on average, slowing
FDI inflows accounted for more than half ofthe slowdown in investment growth.

•

Private sector debt-to-GDP ratios have had
nonlinear effects on investment: withmounting private debt burdens, the beneficial
effects of financial deepening on investment
are increasingly outweighed by adverse effects
of debt overhang (Box 3.1).6 The post-crisis
deleveraging in some commodity-importing
EMDEs has relieved some of the headwinds
to investment growth. In contrast, in several
non-energy commodity exporters, elevatedprivate debt has weighed on investment. In
some energy exporters with initially moderate
post-crisis private debt stocks, a rapid buildup

6Credit to the private sector is used as a proxy for private sector
debt. At 80 percent of GDP, an increase in private debt was
associated with a one-third sharper decline in investment growth thana similarly sized increase in private debt from a starting point of 40
percent of GDP (See Box 3.1 and Annex 3.2A for details on themethodology).

Rising political uncertainty may haveaccounted for about one-tenth of theslowdown in investment growth incommodity-importing and exporting EMDEs
since 2011.

The actual investment growth slowdowns wereconsiderably steeper than predicted by thiseconometric analysis. This suggests that there may
be other, unobserved factors at work or thatimportant nonlinearities have been present thathave amplified the investment growth slowdown
over time. The next two exercises consider some
additional factors that could have been responsible
for the slowdown in investment.
Short-term impact of uncertainty on
investment growth
The annual measure of political risk used in thepanel regression above is available for a large groupof countries over an extended time period. For aconsiderably smaller group of countries and ashorter time window, two more granular quarterly
measures of uncertainty are examined: uncertainty
related to policies, as measured by the Economic
Policy Uncertainty (EPU) index by Baker, Bloom,
and Davis (2016), and uncertainty about financial
market prospects (as proxied by stock market
volatility).
The impact of these two variables on EMDE
investment growth is estimated separately in aseries of vector autoregression models for 18
EMDEs during 1998Q1-2016Q2 (Box 3.2).
Details of the estimation are presented in Annex
3.2B. The results emphasize the importance of
uncertainty in driving investment growth:•

Global financial market uncertainty. The VIX
index, which tracks the implied volatility of
the U.S. S&P 500 stock market price index,
captures global financial market uncertainty as
well as U.S. policy uncertainty. It is a key
explanatory variable in driving EMDE
investment, especially when there has been asustained increase in the index. For example, a
10 percent increase in the VIX would

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.1 Investment-less credit booms
Since the global financial crisis, private credit has risen sharply in several emerging market and developing economies (EMDEs)
and advanced economies (AEs). During this period, credit booms have been unusually “investment-less.” Virtually none of the
post-crisis credit booms have been accompanied by the investment surges that were common in earlier episodes. The absence ofinvestment surges during credit booms is accompanied by lower growth once the credit boom unwinds.
Since the global financial crisis, credit to the nonfinancial
private sector has risen rapidly in several EMDEs while
investment growth has slowed. In the past, credit booms
have often financed rapid investment growth, withinvestment subsequently stalling. Against this background,
this box addresses the following questions:•

How has total investment, including both private andpublic investment, evolved during credit booms anddeleveraging episodes in EMDEs?

•

How often have credit booms been accompanied byinvestment booms?

•

How has output growth evolved during credit booms
and deleveraging episodes in EMDEs?

The results indicate that while investment often rose
sharply during previous credit booms, this has not been sofor credit booms since 2010. This pattern is cause forconcern since, when credit booms unwind, GDP growthtends to contract more if the credit boom was notaccompanied by an investment surge.
Data and methodology. Credit to the nonfinancial private
sector consists of claims—including loans and debt
securities—on households and nonfinancial corporations
by the domestic financial system as well as external
creditors. Details of the dataset can be found in
Annex 3.1A.
A credit boom is defined as an episode during which theprivate sector credit-to-GDP ratio is more than 1.65
standard deviations above its Hodrick-Prescott (HP)filtered trend in at least one year (World Bank 2016b;
Ohnsorge and Yu 2016). An episode starts when thedeviation first exceeds one standard deviation and ends
when the credit-to-GDP ratio begins to fall. Conversely, adeleveraging episode is defined as an episode during which
the private sector credit-to-GDP ratio is more than 1.65
standard deviations below trend in at least one year. The
deleveraging episode starts when the ratio falls more than
one standard deviation below trend and ends when thecredit-to-GDP ratio begins to climb.
Note: This box was prepared by Shu Yu.

Credit booms and deleveraging episodes are studied within
a 7-year event window that covers their peak or troughyears (t=0), the three prior years, and the three following
years. In the sample used here, there have been 59 credit
booms and 28 deleveraging episodes in EMDEs. A typicalcredit boom lasted about 1.7 years, while an averagedeleveraging episode lasted about 1.4 years.
Investment behavior during credit booms anddeleveraging episodes
Credit booms have typically been associated with rising
investment. During the median credit boom over the past
two to three decades, real investment grew by 1 percentage
point of GDP above its long-term (HP-filtered) trend until
the peak of the credit boom (Figure 3.1.1). In a quarter ofprevious credit booms, the real investment-to-GDP ratio
dropped about 2 percentage points below its long-term(HP-filtered) trend over the two years after the peak.
Investment swung sharply in the most severe credit boom
and bust episodes. For example, during the Asian financial
crisis of the late 1990s, in the median affected EMDE,
investment contracted by 3 percentage points of GDP in1998 and by 5.6 percentage points of GDP in 1999.1
Similarly, investment growth slowed during deleveraging
episodes. Real investment dropped below its long-term
trend by about 2 percentage points of GDP during the last
three years of the median deleveraging episode (Figure
3.1.1). After the trough of a typical deleveraging episode,real investment growth bounced back and, within three
years, rose near or slightly above its long-term trend.
Credit and investment booms together
Although investment growth tended to rise during credit
booms, not all credit booms were associated withinvestment booms. For instance, Mendoza and Terrones(2012) document that the coincidence between investment
booms and credit booms in EMDEs was about 34 percent(26 percentage points lower than the coincidence in AEs).
The moderate coincidence of credit booms and investment
booms may reflect credit booms that mainly fueled
consumption (Mendoza and Terrones 2012; Elekdag and
1The directly affected EMDEs include China, Indonesia, Malaysia,
Mongolia, the Philippines, and Thailand.

203

204

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.1 Investment-less credit booms (continued)
FIGURE 3.1.1 Investment growth during credit booms and deleveraging episodes
In EMDEs, in the median credit boom, investment grew by about 1 percentage point of GDP above its long-term trend until
the credit boom peaked. It dropped below its long-term trend by 1-2 percentage points of GDP before deleveraging
episodes reached their troughs.
A. Investment during credit booms

B. Investment during deleveraging episodes
MedianUpper and lower quartiles
Asian financial crisis
2012-2015

Percent of GDP
8
6

Percent of GDP

Median8Upper and lower quartiles

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8
-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

C. Consumption during credit booms

D. Consumption during deleveraging episodes

Percent of GDP

MedianPercent of GDP

6

Upper and lower quartiles

62012-2015
4

4

2

2

0

0

-2

-2

-4

-4

-6
-3

-2

-1

0

1

2

3

Median23Upper and lower quartiles

-6
-3

-2

-1

0

1

2

3

Sources: Bank for International Settlements; Haver Analytics; International Financial Statistics, International Monetary Fund; World Development Indicators, World Bank.
Notes. The red lines show sample medians while the blue lines show the corresponding upper and lower quartiles. A credit boom is defined as an episode during which
the cyclical component of the nonfinancial private sector credit-to-GDP ratio (using a Hodrick-Prescott filter) is larger than 1.65 times its standard deviation in at least one
year. The episode starts when the cyclical component first exceeds one standard deviation and ends in a peak year (“0”) when the nonfinancial private sector credit-toGDP ratio declines in the following year. A deleveraging episode is defined correspondingly. To address the end-point problem of a Hodrick-Prescott filter, the dataset isexpanded by setting the data for 2016-18 to be equal to the data in 2015. Sample is for available data over 1980-2015 for 55 EMDEs. 2015 data are not available for
Gabon, Nigeria, Senegal, and Venezuela, RB. Data are not available for Argentina until 1994, Brazil until 1993, China until 1984, Hungary until 1989, Poland until 1992,
Russia until 1995, Saudi Arabia until 1993, and Turkey until 1986. Please see the main text of World Bank (2016b) for a detailed description of the sample.
A.B. The cyclical component of investment in percent of GDP (derived by Hodrick-Prescott filter). The yellow dashed line is the median annual investment growth rate of
the six EMDEs (China, Indonesia, Malaysia, Mongolia, the Philippines, and Thailand) that were affected by the 1997 Asian Financial Crisis (year 1997 is set to be t=0).
The light blue dashed line for 2012-15 shows the sample median for the corresponding period.
C.D. The cyclical component of private consumption in percent of GDP (derived by Hodrick-Prescott filter). The light blue dashed line for 2012-15 shows the sample
median for the corresponding period. 2015 data are not available for Bahrain, Bolivia, Costa Rica, Hungary, India, Jamaica (also for 2000-01), Kazakhstan, Kuwait,
Oman, Panama, Thailand, Tunisia, and data are not available for Zambia and Venezuela, RB (in 2014).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.1 Investment-less credit booms (continued)
Wu 2013). In a quarter of past credit booms, consumptionrose above its Hodrick-Prescott filtered trend by 3
percentage points of GDP during the peak of the credit
boom. Consumption on average fell below trend by about
1 percentage point of GDP during deleveraging episodes(Figure 3.1.1).
Following former studies and in parallel to credit booms,
investment surges are defined as years when the investment-to-GDP ratio is at least one (1.65 for investment booms)
standard deviation higher than its long-term HodrickPrescott filtered trend. Similarly, episodes of investment
slowdown are defined as years in which the investment-toGDP ratio is at least one standard deviation below its
Hodrick-Prescott filtered trend.2
Investment surges in AEs occurred with credit booms more
often than in EMDEs, with a more rapid rise ininvestment. In EMDEs, about 40 percent of credit booms
were accompanied by investment surges around the peakyear of a credit boom (Figure 3.1.2). More than 65 percent
of investment surges that coincided with credit booms
during the peak year qualified as investment booms inadvanced economies, but only 56 percent of suchinvestment surges turned out to be investment booms in
EMDEs.

FIGURE 3.1.2 Coincidence between
investment surges and credit booms
Before the global financial crisis, about 40 percent of allcredit booms in EMDEs were accompanied byinvestment surges around the boom’s peak. Only one
quarter of credit booms since 2010 have beenaccompanied by investment surges (and virtually none
by investment booms).
A. Investment surges during past booms in EMDEs

Percent of credit booms
50

Investment surge

Investment boom

2010 onwards

1980-2015

40

30

20

10

0
until 2007

B. Investment surges during recent credit booms in EMDEs

In several countries, rapid credit growth fueled aboveaverage consumption growth (Bangladesh, Bolivia, India,
and Ghana) but no investment surge. During the period

2The results are similar when investment growth, instead of theinvestment-to-GDP ratio, is used.
3The four countries are Colombia, Namibia, the Philippines, andSaudi Arabia. The identification of Saudi Arabia is not supported byinvestment growth data.

Number of countries
Credit boom with investment surge

30

Credit boom without investment surge
25

Investment surge

20
15
10
5

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0
2000

After the global financial crisis, the coincidence between
credit booms and investment surges during the peak yearof a credit boom dropped significantly (Figure 3.1.2). By
2007, about half of the EMDEs in a credit boom were also
in an investment surge. However, from 2010 onwards,
there is virtually no EMDE that was both in a credit boom
and in an investment surge. The number of EMDEs in a
credit boom increased from two in 2010 to ten in 2015
(Azerbaijan, Bolivia, China, Cote d’Ivoire, Kenya, Kuwait,
Oman, the Philippines, Qatar, and Turkey) while thenumber of EMDEs in investment surges dropped fromeight to four.3 In AEs, both the number of countries in a
credit boom and the number of countries in an investment
surge fell from around five to almost zero.

Sources: Haver Analytics; International Financial Statistics, International
Monetary Fund; Bank for International Settlements; World Development
Indicators, World Bank.
Notes. Credit booms are defined as in Figure 3.1.1. Investment surge isdefined as years when the cyclical component of the investment-to-GDP ratio
is at least one standard deviation (1.65 for investment booms) above the HPfiltered trend, while investment slowdown is a year when the cyclicalcomponent of the investment-to-GDP ratio is at least one standard deviation
below the HP-filtered trend. Data availability as in Figure 3.1.1.
A. Investment surges during the peak year (t=0) or the following year (t=1).

205

206

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.1 Investment-less credit booms (continued)
FIGURE 3.1.3 Output growth during credit
booms and deleveraging episodes
In EMDEs, output on average grew above its trend by
2 percent during credit booms and fell below trend by 2
percent during deleveraging episodes. Output growthduring credit booms
tended to be stronger whenaccompanied by investment surges. During deleveraging
episodes, declines were deeper when accompanied byinvestment slowdowns.
A. GDP during credit booms
Percent deviation from trend

3

All
With investment surge
Without investment surge
2012-2015 (countries in credit booms)

2
1
0
-1
-2
-3
-4
-3

-2

-1

0

1

2

3

between 2012 and 2015, consumption in EMDEs was
about 0.5 percentage point of GDP above trend, near or
above its median expansion during past credit boom
episodes (Figure 3.1.1).

Output during credit booms and deleveraging
episodesIn general, output has expanded during credit booms, but
by less than investment (Mendoza and Terrones 2012).
Before the median credit boom peaked, output increased,on average, by about 3 percent above trend in cases where
there was an investment surge and by about 1 percent
above trend before the peak years of credit booms in cases
when there was no investment surge (Figure 3.1.3). As
credit booms unwound from their peaks, output dropped
below trend by more than 2 percent over two years in theabsence of investment surges, but by less than half as muchwhen there were investment surges. The more disruptive
unwinding of credit booms without investment surges may
reflect the lack of a boost to potential output from capital
accumulation that could be provided by an investment
surge. In the recent wave of credit surges since 2012,
EMDE output has evolved similarly to that of past credit
booms without investment surges.

B. GDP during deleveraging episodes

During the median deleveraging episode, output fell byalmost 2 percent below trend (Figure 3.1.3). If
accompanied by an investment slowdown, the decline in
output was sharper as output fell from about 1 percent
below trend in the run-up to the deleveraging to about 3
percent below trend around its trough. It took about three
years for output to move back to its trend after adeleveraging episode.

Percent deviation from trend
All
With investment slowdown
Without investment slowdown

2
1
0
-1
-2

Conclusion

-3
-4
-3

-2

-1

0

1

2

3

Sources: Bank for International Settlements; Haver Analytics; International
Financial Statistics, International Monetary Fund; World Development
Indicators, World Bank.
Notes. Credit booms and deleveraging episodes are defined as in Figure 3.1.1
Investment surges and slowdowns are defined as in Figure 3.1.2. Dataavailability as in Figure 3.1.1.
A. Group medians for the cyclical components of GDP in percent of its trend(derived using a Hodrick-Prescott filter) for all credit booms (in blue), credit
booms with investment surge (occurred in 1 year around t=0, in red), andcredit booms without investment surge (in yellow). The mean cyclicalcomponents of GDP in percent of its HP-filtered trend for the ten countries(including Azerbaijan, Bolivia, China, Cote d’Ivoire, Kenya, Kuwait, Oman, thePhilippines, Qatar, and Turkey) in credit booms in 2015 during 2012-2015 arein light blue dashed line.
B. Group medians for the cyclical components of GDP in percent of its trend(derived using a Hodrick-Prescott filter) for all deleveraging episodes (in blue),deleveraging episodes with investment slowdown (occurred in 1 year aroundt=0, in red), and deleveraging episodes without investment slowdown (inorange).

Since 2010, several EMDEs have experienced rapid private
sector credit growth. In contrast to many pre-crisis
episodes, however, these credit surges have typically not
been accompanied by investment surges. Output growthduring the most recent credit surges has also been lower
than in previous episodes. While output has contracted as
credit booms have unwound, it has contracted more whencredit booms have occurred without investments surges.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017considerably reduce EMDE investment
growth (by about 0.6 percentage points within
one year). This type of increase in uncertainty
corresponds to about half of the five-day jumpthat was observed during heightened
uncertainty about the health of the Chineseequity markets and capital outflows in August
2015, or the two-month rise at the height of
the Euro Area crisis in September 2011.
••

Policy uncertainty in the European Union.
Bouts of policy uncertainty in the EU,
especially during the Euro Area crisis, had
spillovers to close economic partners. For
example, the Economic Policy Uncertainty
Index for Europe doubled in June 2016
following the United Kingdom’s vote to exit
the EU or during the four months ending
September 2011 (at the height of the EuroArea crisis). These uncertainties have reduced
investment, especially in EMDEs in the ECA
region.
Domestic policy uncertainty. A 10 percent
increase in the EPU Index of domestic policy
uncertainty in Brazil may have reduced
investment growth by about 1 percentage
point.

Adverse spillovers from major economies
Disappointing U.S. and Euro Area activity. U.S.
and Euro Area growth has repeatedly disappointed
expectations in recent years. Long-term consensus
growth forecasts for the United States and theEuro Area have been revised downwards from 2.9
and 1.7 percent a year in 2010 to 2.3 and 1.4
percent a year in 2015, respectively—below precrisis estimates of potential growth. Weaker
growth prospects in these two major economies, inturn, worsened EMDE growth prospects andreduced incentives for investment in their EMDE
trading partners.
In 2015, the United States and the Euro Areaaccounted for 22 and 16 percent of global output,
respectively, and for 11 percent and 25 percent,respectively, of global trade. Given the sheer
size of these economies and their degree of tradeand financial integration with the rest of the

CHAPTER 3

world, a slowdown in their growth significantly
worsens growth prospects for EMDEs (WorldBank 2016a).
To quantify growth spillovers from the UnitedStates and the Euro Area (which complements thepreviously described panel regression using annual
data), Bayesian structural vector autoregressions
were estimated for 1998Q1–2016Q2 for 18
EMDEs (excluding China, details of the model arepresented in Annex 3.2C). The main results are as
follows:•

Spillovers from the United States. A 1
percentage point decline in U.S. output
growth reduces average EMDE output growthover the following year by about 0.8
percentage point (Figure 3.12). Perhaps inrecognition of the possibility that U.S. adverse
growth shocks are persistent, EMDE
investment growth responded considerably
more sharply to U.S. growth slowdowns than
EMDE output growth.

•

Spillovers from the Euro Area. A 1 percentage
point decline in Euro Area output growth
lowered EMDE output growth by about 1.3
percentage points within a year. Again,
EMDE investment growth responded almost
twice as strongly (2.1 percentage points) than
EMDE output growth. The somewhat larger
estimated magnitude of spillovers from theEuro Area than from U.S. growth shocks may
reflect the greater trade-intensity of Euro Area
activity (Figure 3.12).

Policy-driven slowdown in China. Sluggish
economic activity in major AEs has coincided witha policy-driven slowdown in output growth inChina. This has been accompanied by arebalancing from investment growth towards
other, less trade-intensive sources of growth. As aresult, China’s investment growth has slowed
gradually from record-high levels in the wake ofthe crisis (Box 3.3).
China is now the largest single trading partner for
many EMDEs, especially in Sub-Saharan Africa. It
accounted for virtually all of the increase in global
metals demand and about half of the increase in

207

208

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.12 Spillovers from the United States and theEuro Area

To estimate the magnitude of the impact ofChina’s output and investment slowdown on
EMDE activity, a Bayesian vector autoregression isestimated for 1998Q1–2016Q2 for 18 EMDEs. A
1 percentage point decline in China’s output
growth is accompanied by about 0.5 percentage
point slower output growth in other commodityimporting EMDEs and 1 percentage point slower
output growth in commodity-exporting EMDEs
within a year. Since much of China’s investment isresource-intensive, China’s rebalancing away frominvestment has had an additional adverse impact
on commodity-exporting EMDEs.

Weak growth in the United States and the Euro Area has had adverse
spillovers on output and investment in EMDEs.
A. Five-year ahead growth forecasts
for the United States and Euro Area

B. Import intensity of demand
components, 2014
Percent

Percent
United States

3.0Euro Area

Private Consumption
Investment
Export

40

2.5

30

2.0

20

1.5

10

1.0

0

2010

2011

2012

2013

2014

2015

China

US

Euro Area

C. Spillovers to EMDE output growthfrom decline in U.S. output growth

D. Spillovers to EMDE output growthfrom decline in Euro Area output
growthPercentage points
0.0

Percentage points
0.5
0.0

-0.5

Implications of weak
investment for global
trade, long-term growthand catch-up

-0.5
-1.0

-1.0

-1.5
-2.0

-1.5

-2.5
-2.0

-3.0
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter

6

7

E. Spillovers to EMDE investment
growth from decline in U.S. output
growthF. Spillovers to EMDE investment
growth from decline in Euro Area
output growth

Percentage points
1.0

Percentage points
1.0

0.0

0.0

-1.0

-1.0

8

-2.0

-2.0

-3.0

-3.0

-4.0

-4.0

-5.0

-5.0

The post-crisis investment growth slowdown fromrecord-high pre-crisis rates has lasting implications
for global trade and long-term growth prospects.
In many countries, investment is more importintensive than other components of output. A
slowdown in investment growth, therefore, weighsheavily on global trade growth. Moreover, byslowing the rate of capital accumulation andtechnological progress embedded in investment, aprolonged period of weak investment growth can
set back potential output growth in EMDEs foryears to come, with adverse implications for theirability to catch up with AE income levels.

-6.0
1

2

3

4
5
Quarter

6

7

8

1

2

3

4
5
Quarter678Sources: Consensus Economics, World Bank estimates, World Input-Output Database.
A. Five-year ahead Consensus Forecasts as of the latest available month in the year denoted.
C.-F. Cumulative impulse response of weighted average EMDE output growth (C.D.) or investment
growth (E.F.) at 1-8 quarters to a 1 percentage point decline in growth in real GDP in the UnitedStates (C.E.) and Euro Area (D.F.). Growth spillovers based on a Bayesian vector autoregression ofworld GDP growth (excluding the source country of spillovers), output growth in the source country of
the shock, the U.S. 10-year sovereign bond yield, JP Morgan’s EMBI index, investment (E.F.) or
output (C.D.) in EMDEs excluding China. The oil price is exogenous. Blue dotted lines denote 16th84th percentile confidence intervals, and blue solid lines denote median responses. Sample includes
18 EMDEs (Brazil, Bulgaria, Chile, Costa Rica, Hungary, India, Indonesia, Malaysia, Mexico,
Paraguay, Peru, the Philippines, Poland, Romania, Russia, South Africa, Thailand, and Turkey) from
1998Q1-2016Q2.

global primary energy demand from 2010-14(World Bank 2016a; Huidrom, Kose, andOhnsorge forthcoming). As a result, China’s
output and investment slowdown has weighed on
growth in other EMDEs.

Slower global trade. Since investment tends to be
more import-intensive than other components ofdemand, investment weakness has been an
important source of the post-crisis global trade
slowdown (World Bank 2015b; IMF 2016;
Constantinescu et al. 2016). This was reflected in
weak import growth in capital goods (typicallymachinery and equipment), which accounted forabout 14 percent of EMDE imports during 2015
(Figure 3.13). Capital goods imports tend toembody efficiency-enhancing technology transfers
across borders (Alfaro and Hammel 2007). Hence,
their slowdown may also be reflectedin slowing EMDE productivity growth. Post-crisis
global investment weakness was accompanied by a

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.2 Implications of rising uncertainty for investment in EMDEs
Political and policy-related uncertainty has increased since the global financial crisis for most EMDEs. EU policy uncertainty has
reduced investment in the EU’s EMDE trading partners, and domestic policy uncertainty has weighed significantly on investment
in Brazil. Global financial market uncertainty (as measured by the VIX) significantly affects EMDE investment.
Elevated macroeconomic and policy uncertainty after thecrisis has contributed to weak investment growth in AEs(Kose and Terrones 2015). However, less is known about
the implications of uncertainty for EMDEs. This box
examines the effects of uncertainty on investment growthby addressing the following questions:•

What are the basic sources of uncertainty?

•

How has uncertainty evolved in EMDEs since the
2008-09 crisis?

•

How has uncertainty affected investment in EMDEs?

The results suggest a post-crisis rise in political and policy
uncertainty in EMDEs and bouts of financial market
uncertainty amidst ample global liquidity. Policy
uncertainty in the European Union (EU)—including thatassociated with the Euro Area crisis—has weighed oninvestment in the EU’s EMDE trading partners in Europe
and Central Asia. Domestic policy uncertainty has sharply
curtailed investment in Brazil.

Basic sources of uncertainty
Although uncertainty is often discussed in policy debates,
there is no universally agreed measure of it. This box uses
three measures for EMDEs, the United States, as well as
the EU.

FIGURE 3.2.1 Evolution of uncertainty in
EMDEs
While financial market uncertainty, defined in terms ofstock market volatility, has declined in most EMDEs,
policy and political uncertainty increased from the precrisis to the post-crisis period for most EMDEs.
Generally low post-crisis financial market volatility wasinterrupted by several bouts of global financial market
volatility.
A. Share of EMDEs with higher uncertainty in post-crisis
than pre-crisis.
Percent
100
80
60
40
20
0
Financial market
uncertainty

Political risk

EPU

B. Evolution of uncertainty
Index, 2002Q1=0
Financial market uncertainty•

Economic Policy Uncertainty. The Economic Policy
Uncertainty (EPU) Index is a news-based measure tocapture policy-related uncertainty developed byBloom, Baker, and Davis (2016). The EPU index isconstructed from counts of terms related to policy

Note: This box was prepared by Jongrim Ha, Raju Huidrom, andCongyan Tan.

Political Risk

6

EPU
VIX
3

0

2016

2014

2012

2010

2008

2006

-3

2004

Financial market uncertainty. Financial market
uncertainty is measured by a quarterly financial
market volatility measure, which is constructed using
the realized standard deviation of daily changes
in stock price indexes (Bloom, Bond, and Van Reenen
2007; Bloom 2009; Gilchrist, Sim, and Zakrajsek
2014). The VIX index of implied volatility of the
S&P 500 stock market index in the United States
is used as an indicator of global financial market
volatility.

2002

•

Sources: Baker, Bloom, and Davis (2016); Bloomberg; Haver Analytics;
International Country Risk Guide; World Bank estimates.
Notes: 33 countries for measure based on standard deviation of daily stock
market changes; 102 countries for ICRG political risk score; and 4 countries(Brazil, China, India, and Russia) for the EPU measure. Financial market
uncertainty refers to realized standard deviation of daily changes in stock
price changes. Political risk refers to the ICRG political risk index (adjusted
such that higher index denotes higher risk).
A. Pre-crisis and post-crisis refer to 2003-08 and 2010-15, respectively. To
exclude data for the spike in global financial market uncertainty in the wakeof the bankruptcy of Lehman Brothers, pre-crisis average for financial
market uncertainty excludes 2008. Last observation is for Q1 2016.
B. All series are normalized to standard deviation of 1.

209

210

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.2 Implications of rising uncertainty for investment in EMDEs (continued)

Percentage points
0.0

-0.5

-1.0

-1.5

-2.0
1

2

3

4
Quarter

5

6

7

8

B. Contribution of the VIX to EMDE investment growth
Percent
VIX

16

OthersActual

12
8
4
0
-4

2016

2015

2014

2013

-8

2012

In most EMDEs, political and policy uncertainty werehigher post-crisis (2010-2015) than pre-crisis (20032008), as indicated by the ICRG-based politicaluncertainty and EPU-based policy uncertainty measures(Figure 3.2.1). Political risk increased in more than fourfifths of EMDEs and policy uncertainty increased in all
four major EMDEs for which data are available. In
contrast, financial market volatility, as measured by thestandard deviation of domestic stock market indexes,
declined in most EMDEs, reflecting exceptionallyaccommodative monetary policies and record-low interest
rates globally. The generally low post-crisis financial market
volatility was disrupted by several bouts of global financial
market uncertainty. The VIX, which in normal
circumstances tends to fluctuate in the 10-30 range,
surged to above 40 basis points during periods of intense
market concerns about the future of the Euro Area (March-June 2010 and May-September 2011) and about thestability of Chinese equity markets and growth prospects(July-August 2015).

A. Investment response to a 10 percent increase in the VIX

2011

Evolution of uncertainty in EMDEs since the 200809 crisis

Rising global financial market uncertainty, as capturedby the VIX, reduces EMDE investment. Accommodative
monetary policy by major central banks has reduced
financial market uncertainty.

2010

Political uncertainty. Political uncertainty is measured
by the political risk rating developed by the Political
Risk Services Group’s (PRS) International Country
Risk Guide (ICRG). The rating simply summarizes
expert judgment on each economy’s politicalenvironment. As used here, a higher value of the index
reflects greater political risk. For the four EMDEs
with available data, the ICRG risk scores are positively
correlated with the EPU Index, suggesting overlap
between political risk and policy uncertainty.

2009

•

FIGURE 3.2.2 Financial market uncertainty
and investment in EMDEs

2008

uncertainty appearing in newspapers in each country.
This measure is available for four EMDEs: Brazil,
China, India, and Russia.

Impact of uncertainty on investment in EMDEs
To assess the effects of uncertainty on investment during
1998Q1-2016Q2, a series of vector autoregressive models
were estimated for 18 EMDEs. Two sources of uncertainty
were distinguished: domestic and global. Global financial
market uncertainty was captured by the VIX. Global policy
uncertainty was captured by the EPU for the United States
and the EU. Domestic policy uncertainty was captured by
the EPU for Brazil. Details of the estimation are presented
in Annex 3.1B.

•

Global financial market uncertainty. Global financial
market uncertainty shocks, as measured by spikes in

Sources: Bloomberg, Haver Analytics, World Bank estimates.
Note: Vector autoregressions are estimated with sample for 1998Q12016Q2. The model includes, in this order, the VIX, MSCI Emerging
Markets Index (MXEM), J.P.Morgan Emerging Markets Bond Index(EMBIG), aggregate real output and investment growth in 18 EMDEs with
G7 real GDP growth, U.S. 10-year bond yields, and MSCI World Index as
exogenous regressors and estimated with two lags. Estimates for 2016 arebased on the first half in 2016 (annualized).
A. Shows cumulative responses of EMDE investment to a 10 percent
increase in the VIX. Solid lines indicate the median responses and thedotted lines indicate 16-84 percent confidence intervals.
B. Indicates historical decomposition to EMDE investment. “Others”
indicates other EMDE and global factors, including stock and bond priceindex.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.2 Implications of rising uncertainty for investment in EMDEs (continued)
FIGURE 3.2.3 Policy uncertainty and investment in EMDEs
Elevated policy uncertainty in Europe set back investment in ECA. Policy uncertainty has been a significant cause of theinvestment slump in Brazil since 2013.
A. ECA investment response to 10 percent increase in EU policy
uncertainty

B. Investment response to 10 percent increase in policy
uncertainty in Brazil

Percentage points

Percentage points

0.5

0.0

-0.5
-1.0
-1.5

-2.5

-2.0
1

2

3

4

5

6

7

8

1

2

3

4

Quarter

5

6

7

QuarterC. Contribution of EU policy uncertainty to ECA investment
growthD. Contribution of domestic policy uncertainty to Brazil’s
investment growth

Percent

Percent
EPU

15

8

OthersActualEPU

20

OthersActual

10
10

5
0

0

-5
-10

-10

-15

2016

2015

2014

2013

2012

2011

2010

2009

2008

2016

2015

2014

2013

2012

2011

2010

2009

-20

2008

-20

Sources: Bloomberg, Haver Analytics, World Bank estimates.
A.C. Vector autoregressions are used for estimation on a sample of aggregate EMDE variables for 1998Q1-2016Q2. The model includes the EPU for the Euro Area,
emerging market stock price (Euro Area) index, emerging market bond index, aggregate real output and investment growth in 6 ECA countries, with G7 real GDP growth,
U.S. 10-year bond yields, and MSCI World Index as exogenous regressors and estimated with two lags.
B.D. Country-specific autoregressions are estimated for Brazil for 1998Q1-2016Q2. The model includes the domestic EPU, domestic stock market index, domestic shortterm interest rates, and real output and investment growth, with G7 real GDP growth and VIX as exogenous controls and estimated with two lags.
A.B. Show cumulative responses of investment to a 10 percent policy uncertainty shock in the Euro Area and Brazil. Solid lines indicate median responses. Dotted lines
indicate the 16-84 percent confidence intervals. Figures C. and D. indicate historical decomposition to investment growths in ECA and Brazil, respectively. Estimates for2016 are based on the first half in 2016 (annualized).

the VIX, significantly reduced EMDE investment, inline with findings of earlier studies (Carrière-Swallow
and Céspedes 2013). Specifically, a 10 percent
increase in the VIX reduced average EMDE
investment growth by about 0.6 percentage point
within a year (Figure 3.2.2). Financial market

uncertainty was the key source of the slowdown in
EMDE investment growth in 2008-09. Bouts ofglobal financial market uncertainty (such as during theEuro Area crisis, the 2013 Taper Tantrum, and the2016 Brexit) also weighed on EMDE investment.

211

212

CHAPTER 3

BOX 3.2 Implications of rising uncertainty forinvestment in EMDEs (continued)•

Global policy uncertainty. Policy uncertainty in major
AEs could also generate significant spillovers to EMDE
investment. Policy uncertainty in the EU had anespecially sizable impact on investment in EMDEs in
Europe and Central Asia: a 10 percent increase in EU
policy uncertainty reduces their investment growth by
0.6 percentage point within a year (Figure 3.2.3).
During the Euro Area crisis in 2010-12, EU policy
uncertainty may have reduced investment growth in
EMDEs in Europe and Central Asia by 0.6-1.3
percentage points with a certain time lag.

•Domestic policy uncertainty. For those EMDEs for which
the EPU is available, domestic policy uncertainty also
appears to have been accompanied by significantly lower
investment: a 10 percent increase in Brazil’s EPU may
have reduced investment growth by around 0.8
percentage point within a year.

Conclusion
The post-crisis rise in political and policy uncertainty
in most EMDEs has contrasted with a decline in financial
market uncertainty amidst benign global financing
conditions until late 2016. Low global financial market
uncertainty has supported EMDE investment. In contrast,
increased policy uncertainty in the EU has significantly
reduced investment in EMDEs in Europe and Central Asia.

pullbackinproductive
investmentofmultinational companies, which account for onethird of global trade. Capital expenditures(excluding mergers and acquisitions) by the 5,000
largest multinationals shrank in both 2014 and2015 (UNCTAD 2016).
The global trade slowdown is not only a symptom,
but also a transmission mechanism that propagatesthe slowdown in investment across countries(Freund 2016). Trade can facilitate more efficient
allocation of capital goods and, thus, improve
aggregate productivity which, in turn, would
encourage investment (Mutreja, Ravikumar, andSposi 2014).
Slower capital accumulation. Among OECD
countries, the post-crisis slowdown in potential
growth to a large extent reflects the slowing paceof capital deepening (Ollivaud, Guillemette, and

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Turner 2016; Hall 2016). Similarly, slowing
capital accumulation weighs on potential growthin EMDEs.7
Weaker productivity growth. In addition to
slowing capital accumulation, weak investment
growth is associated with slower total factor
productivity growth, as investment is often criticalto the adoption of new, productivity-enhancing
technologies.8 Among AEs, a steady productivity
growth slowdown was underway even before theglobal financial crisis. Possible drivers include
structural change towards lower-productivity
services, caused partly by demand shifts related topopulation ageing, a lack of transformative
innovations, and slower technology diffusion.9
Weaker investment growth may partly account forthe slowdown in total factor productivity growthin EMDEs, from 2.2 percent in 2010 to -0.2
percent in 2015.10 The productivity slowdown was
most pronounced in commodity-exporting
EMDEs and those EMDEs with the slowest
investment growth (Figure 3.14). Weaker totalfactor productivity growth would also be reflectedin slower labor productivity growth—the key
driver of long-term real wage growth andhousehold income growth (Blanchard and Katz
1999; Feldstein 2008).
Slower income catch-up. Weak investment
growth in EMDEs is both a symptom and asource of slowing pace of catch-up to AE income
levels. Specifically, by reducing potential growthin EMDEs relative to AEs, it slows the pace ofcatch-up in per-capita incomes. In 2015, thedifference in investment growth between EMDEs
and AEs reached its lowest level since the early
2000s. If weakness in investment growth persists

7If investment growth is assumed to remain as low as in 2015 (3.3
percent), 2020 potential growth would be about two-thirds ofpotential growth in the pre-crisis investment growth scenario.
8Gollop, Fraumeni, and Jorgenson (1987); Griliches (1988);
Jorgenson (1991); Colecchia and Schreyer (2002); Bourreau,
Cambini, and Dogan (2012); and OECD (2016a).
9Brynjolfsson and McAfee (2011); Cowen (2011); Gordon(2012); Bailey, Manyika, and Gupta (2013); McGowan and Andrews(2015); Andrews, Criscuolo, and Gal (2015); and OECD (2016a).
10TFP is calculated as residual from the growth-accounting
framework in Didier et al. (2015). The slowdown happened despitesome evidence of somewhat faster cross-country technology
absorption from countries at the productivity frontier (Comin andFerrer 2013; IFC 2016a).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

in EMDEs, per capita income catch-up to U.S.
levels would require several generations.11 Since
growth remains one of the most powerful driversof poverty reduction, any setbacks to growth also
imperil the achievement of global goals for poverty
reduction (World Bank 2015d).

FIGURE 3.13 Slowdown in investment and global trade
The investment growth slowdown across the world has been accompanied
by a downturn in the growth of exports as well as capital goods trade.
A. World investment and exports

B. Investment and exports growth:
EMDEs

Log index, 1995=0
1.4

Policies to promote
investment growth213

CHAPTER 3

Investment

1.2

Exports

1995-2008 Trend

1.0

Percent

1990-2008 average

12

2003-08 average

8

0.8
4

0.6
0.4
1995-2008 Trend

Although specific policy needs depend on country
circumstances, in order to have a sustained
improvement in investment growth prospects, it is

2015

2014

2013

2012

Exports

100
50

2015

150

2014

200

2013

250

2012

300

2011

US$, billions Capital expenditures US$, billions
2500
800
Acquisition outlays (RHS)
700
2000
600
500
1500
400
1000
300
200
500
100
0
0

Capital goods trade
Investment
Pre-crisis trend

2010

Index, 2000=100
350

2009

D. Investment by 5,000 largest
multinational companies

2008

C. Global capital goods trade andinvestment

Sources: Haver Analytics; Thomson ONE; UNCTAD (2016); World Integrated Trade Solution, World
Bank; World Bank.
A. Denotes levels of real gross fixed investment as well as exports.
B. Weighted averages. Long-term average for investment starts in 1991 due to data availability.
C. Capital goods trade and gross fixed capital formation expressed in current U.S. dollars. Trend line
shows the pre-crisis (2003-08) trend of the average of capital goods trade.
D. Top 5,000 MNEs capital expenditures and acquisition outlays based on data from Thomson ONE.

necessary to employ a full range of available
policies—counter-cyclical fiscal and monetarystimulus, as well as structural reforms. A twopronged approach would simultaneously boost
public and private investment. Fiscal policy
measures could help by directly expanding public
investment, while monetary policy could boost
activity mainly through lowering the cost offinancing for investment. Structural reforms could
support investment by addressing the factors
holding back private investment, including
measures to improve aggregate growth and thebusiness climate, as well as to reduce uncertainty.
Fiscal policy

To the extent that weak investment growth is associated withweak TFP growth, slowing income catch-up can be further
compounded, as TFP differences are a major source of differences incross-country income per capita (Klenow and Rodriguez-Clare 1997;
Hall and Jones 1999; Caselli 2005; and Hsieh and Klenow 2010). An
ageing population in many EMDEs, however, may be a force insupporting a higher capital level per person (Bussolo, Koettl, andSinnott 2015).

2011

2010

2015

2014

2013

2012

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

Investment

2007

Yet many EMDEs have large unmet investment
needs. First, a number of EMDEs are poorly
equipped to keep pace with rapid urbanization,
growing economic activity, and changing demands
on workforce. Second, investment is also needed
to smooth the transition away from growth driven
by natural resources (in commodity exporters) or
nontradables sectors (in some commodity
importers) towards more sustainable sources ofgrowth. Finally, a boost to private investment,
especially, would help revive slowing productivity
growth. The specific investment priorities differ
across countries and regions (Boxes 2.1.1-2.6.1).
Robust policy action—even in countries withlimited room to mobilize domestic resources—isneeded to accelerate investment growth prospects.

2011

0

0.0

2010

0.2

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

The analysis in this chapter suggests that both
external and domestic factors are holding backinvestment in EMDEs. External factors include
weak FDI inflows, low commodity prices, andbouts of global policy or political uncertainty.
Domestic factors are overall weakness in economic
activity and heightened domestic policy
uncertainty. In the near-term, some of thesedrivers of investment growth are expected to turnmore benign, but only very gradually. Investment
growth is therefore expected to remain weak.

11

Public investment accounted for 31 percent of
total investment in EMDEs and 15 percent of
total investment in AEs, on average, over theperiod 2010-15. In AEs, public investment
growth has moved broadly counter-cyclically to214

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.3 Investment slowdown in China
Investment growth in China has halved since 2012, in a rebalancing towards more sustainable growth. Private investment
growth slowed sharply amidst a policy-driven decline in investment in state-owned enterprises.1 Most recently, stimulus-driven
infrastructure investment through share-holding enterprises has partly offset a decline in private and SOE investment. Private
investment weakness has reflected deteriorating business confidence and weak return prospects. The investment slowdown in
China has weighed on output growth in other countries, especially commodity-exporting EMDEs.
China is deeply integrated into the global economy. Its
imports account for one-tenth of global imports, its output
for more than one-tenth of global output, its investment
for one-fifth of global investment, and its investment
growth for 42 percent of post-crisis global investment
growth (during 2010-15).
A policy-driven rebalancing away from investment- andexport-driven growth towards a more sustainable growthmodel has been underway for several years (Hong et al.
2016). In the process, investment growth in China slowed
sharply from a stimulus-driven 21 percent in 2012 to 10
percent in 2015—with global repercussions.2 China’s
investment slowdown accounted for one-third of theslowdown in global as well as EMDE investment growthfrom 2010 to 2015. Given the role of China in the global
economy, it generated sizable adverse spillovers to other
EMDEs.
Monthly data available for nominal fixed asset investment(FAI) suggests a further slowdown in 2016: growth in thismeasure fell to 8 percent (year-on-year) in October 2016
from 21 percent in the year to December 2012, with asharp shift in composition from the private sector to the
publicly controlled sector. FAI by state-owned enterprises
or enterprises with majority state participation grew by
20.5 percent (year-on-year) while private investment
growth slowed to 2.9 percent (Figure 3.3.1).3 Weak private
sector investment adds to concerns about growth prospects
as the private sector generates about 65 percent of total
investment, around 50 percent of GDP, and 80 percent of
employment.
Note: This box was prepared by Ekaterine Vashakmadze, Hideaki
Matsuoka, and Trang Nguyen, with contributions from Raju Huidrom.
1Private investment (“minjian” investment) is defined by the Chinese
National Bureau of Statistics as the sum of Fixed Asset Investment (FAI)
made by enterprises that are registered as collectively-owned, cooperative,
private sole proprietorship, private partnership, private limited liability
company, business individual, or partnership of business individuals.
Private (“minjian”) investment also includes FAI by those enterprises inwhich the above-mentioned entities hold a controlling ownership stake.
2Major stimulus was initiated in 2009.
3In the remainder of this box, investment is measured as FAI (innominal terms), for which monthly data are available. Unlike gross fixed
capital formation (in real terms) in the national accounts, it includes
purchases of land and other already-owned assets. Real gross fixed capitalformation from the national accounts is only available on an annual
basis.

Against this backdrop, this Box addresses the following
questions:1.

How has investment in China evolved since 2010?

2.

What has driven the slowdown in China’s investment
growth?

3.

How large are the spillovers from China’s investment
slowdown?

4.

Which policies can support an orderly rebalancing ofinvestment in China?

This box documents the slowdown in China’s investment
growth as well as its shifting composition, withpronounced private sector investment weakness. The
slowdown in China’s investment growth may have reduced
commodity-exporting EMDEs’ growth by about 0.8
percentage point a year, on average, during 2012-15.
Policy options to reinvigorate private investment include
efforts to facilitate private firm entry and reduce
administrative burdens.
Evolution of fixed asset investment since 2010
Sharp slowdown in investment, shift away from privateand SOE investment. Overall investment growth has
slowed sharply to 9 percent (year-on-year) in October
2016, from 10 percent at end-2015 and 24 percent in2010 (Figure 3.3.1). The slowdown was most pronounced
in the private sector. In October 2016, private investment
growth slowed to 2.9 percent year-on-year—a steep
slowdown from 10.2 percent growth a year earlier and 30
percent in 2012.4 Meanwhile, state-owned enterprise(SOE) investment growth also continued to slow to -6
percent (year-on-year) in October 2016 from 12 percent in
the previous year. 5 The slowdowns in SOE and private
investment were partly offset by state-supported
investment by state-owned enterprises or enterprises withmajority state participation.
State-supported investment by state-owned enterprises orenterprises with majority state participation. To stem
Narrowly defined private investment growth that refers to private
enterprises also slowed from 30 percent in 2012 to 9.7 percent in
October 2016.
5SOE refers to state-controlled or non-corporatized SOEs.
4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.3 Investment slowdown in China (continued)
stock market volatility in August 2015, state-owned
companies and government units purchased privatecompany shares on the order of 2 percent of stock market
capitalization at end-2015.6 As a result, the state became
the major or controlling shareholder in companies that
previously were not state-controlled. This reclassification offirms in the official data has exaggerated the divergence
between SOE, mixed-ownership enterprise, and private
investment in 2016 (Lardy and Huang 2016; Kuijs 2016;
Coflan 2016).7
Broad-based slowdown in private investment growth. The
slowdown in private FAI growth since 2010 has beenbroad-based across all sectors. Private FAI has actuallycontracted sharply in overcapacity sectors, especiallymining and construction. FAI growth has also slowed in
the manufacturing sector, as weak export growth anderoding profit margins have discouraged investment
spending by private companies. Even in the services sector,
after 9.4 percent growth in 2015, private investment
growth declined to 2.1 percent (year-on-year) in 2016H1
and came to a virtual standstill in July 2016 as investmentin the transport sector stalled.
Drivers of the investment slowdown
State-controlled enterprises: Policy-driven cuts inovercapacity. The slowdown in SOE investment growth
has partly reflected policy-driven capacity cuts ordeleveraging in overcapacity sectors where SOEs
predominate (Xing, Sun, and Zheng 2016). Microeconomic policy interventions, especially since 2013, have
sharply reduced activity in officially designated “excess
capacity” or polluting industries, such as coal and steel
production. These cuts are likely to continue in themedium-term. In February 2016, additional capacity
reduction targets were announced for coal and steel and a
6The purchase happened in August 2015, but the reclassification
started from 2016. The SOE assets reported by SOE jumped in August
2015 (Lardy and Huang 2016).
7State investment includes three components: state enterprises,
government administrative units, and public institutions. State
enterprises include 1) traditional state-owned companies; 2) state-owned
companies that have been converted to a corporate form of ownership,
typically a limited liability or joint stock company, in which the state is
the sole, majority, or dominant owner; 3) companies, including joint
ventures, in which the state and a non-state firm or individual eachcontribute 50 percent of a firm’s capital; and 4) consultatively statecontrolled companies in which the state capital contribution is less thanthat of one or more other shareholders but in which the state exercises
control by virtue of agreement with the other shareholders or capital
contributors. State investment also includes investment by government
administrative units and public institutions (Lardy and Huang 2016).

fund was established to re-employ or compensate affected
workers. Capacity cuts were accompanied by othermeasures to strengthen SOE efficiency, including ten pilot
programs for SOEs introduced in September 2015 andFebruary 2016. Some provinces began in June 2016 torestructure unviable SOEs.
Private enterprises: Falling returns. Just over a third of thedeceleration in private investment growth thus far in 2016
can be attributed to the slowing manufacturing sector (Quand Wang 2016). Weakness in manufacturing investment
reflects deteriorating business confidence and risingfunding costs amid weak return prospects. Slowing export
and domestic demand growth and persistent producer
price deflation have weighed on return prospects. Between
2011 and 2015, the annual return on investment of private
industrial enterprises has been estimated to have fallen by 3
percentage points to 8.5 percent, according to official data.
Despite recent efforts to cut red tape, private enterprises
still face high entry barriers, sales taxes, and surcharges bycomparison with other countries in the region (Ernst andYoung 2016).
Spillovers from China’s investment growth
slowdown
While the investment growth slowdown is an integral partof ensuring sustainable growth in China in the medium tolonger term, it has had significant negative repercussions
on activity both domestically, given investment’s large
share in China’s GDP (about 43 percent in 2015), andglobally because of China’s large role in the global
economy. A slowdown in investment spills over to othersectors of the domestic economy through industry andfinancial linkages.8 Since investment is more importintensive than other components of demand, adverse
external spillovers from China’s investment slowdown havebeen particularly pronounced. For example, China imports
large volumes of minerals and metals from countries in
Latin America and Sub-Saharan Africa (World Bank
2015a, c). Thus, about 40-50 percent of China’s import
growth slowdown from 2014-15 has been attributed to
weak investment (Kang and Liao 2016).
The GDP growth slowdown triggered by an investment
slowdown can generate sizable cross-border spillovers(World Bank 2016a; Huidrom, Kose, and Ohnsorge
forthcoming). A structural vector autoregression model was

8For example, real estate investment in China, which accounts for 25
percent of FAI, has extensive industrial and financial linkages with othersectors of the domestic economy (Ahuja and Nabar 2012a).

215

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.3 Investment slowdown in China (continued)
FIGURE 3.3.1 Investment growth in China
Investment growth has slowed sharply since 2012, especially private investment (or “minjian” investment) growth. The
slowdown in private investment growth has been broad-based, with only a modest part explained by data reclassifications.
The private investment slowdown reflects deteriorating business confidence and weakening returns prospects, partly as aresult of weaker demand prospects but also because of rising impediments to firms’ startup and exit, contract enforcement,
and tax payments.
A. Fixed asset investment (FAI) growth
Percent,
year-on-year,
6mma

B. Sectoral contribution to private (“minjian”) investment growth
Percentage points, year-on-year

Enterprises with state participation

Service
Construction
Electricity/ Gas/ Water production
Manufacturing
MiningAgriculture

Private ("minjian")
Total
25

50

20

40

15

30

10
20
5
10
0
0
2006

2008

2010

2012

2014

2016

Index

2013

Index
20

Entrepreneurs Confidence
General Business Confidence

90

-5
2014

2015

2016YTD

D. Change in doing business’ distance to frontier rankings from2010 to 2016

C. Business confidence

Overall change in score

15

Profitability

10

80

5
0

70

-5
60

Paying Taxes

Resolving
Insolvency

Starting a Business

Enforcing Contracts

Getting Electricity

Registering
Property

Trading acrossBorder

2016

2015

2014

2013

2012

2011

2010

2009

40

Getting Credit

50

Protectionof Minority Investors

-10

2008

216

Sources: China Economic and Industry Data Database, China’s National Statistical Office, Haver Analytics, The Conference Board, World Bank.
A.B. “Enterprises with state participation“ includes enterprises that are state-owned or those with state participation. Investment is defined as fixed assets investment,
which differs from gross fixed capital formation in the national accounts by including land sales. Six-month moving averages (6mma) of year-on-year growth rates. Latest
observation is October 2016. See Footnote 1 for the definition of private (“minjian”) investment.
C. China industrial enterprise survey of 5000 leading enterprises to rate their perception on selected topics. Index higher than 50 indicates improvement. Latest
observation is 2016Q3.
D. Distance of China to the “frontier”-best performers whose score is 100. An increase in scores indicates improvement; a decrease deterioration.

estimated for 1998Q1–2016Q2 for 18 EMDEs to assess
the magnitude of these spillovers. Details of the estimation
are described in Annex 3.2C.
Since much of investment is resource-intensive, the impactof an investment slowdown on commodity-exporting
EMDEs is measured to be twice that on commodity-

importing EMDEs. A 1 percentage point decline in
Chinese annual investment growth reduces output growthin commodity-exporting EMDEs, on average, by 0.3
percentage point over the following year, about one-third
the impact of a similarly-sized slowdown in overall output
growth in China. In 2012-15, slowing investment growthin China may have reduced commodity-exportingGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.3 Investment slowdown in China (continued)
FIGURE 3.3.2 Spillovers from China
Since investment in China accounts for a large share of domestic output and is import-intensive, its investment growth
slowdown has weighed on output growth, both domestically and in other EMDEs.
A. Import intensity of China’s investment, exports andconsumption, 2014

B. Share of investment in China’s GDP

Percent

Percent of GDP
60

20
50
15

40
30

10
20
5

10
0

0
Private Consumption

Investment

2010

Export2015

C. Response of EMDE output growth to a decline in China’s
investment, export and output growth

D. Contribution of China’s investment and non-investment
movements to commodity-exporting EMDE growth

Percentage point

Percentage point

16-84 percent confidence bands

3

Median

0.2
2

-0.2

1

-0.6

0

-1.0

-1

-1.4

-2

-1.8

-3

Investment

ExportGDP

Commodity exporters

Investment

ExportGDP

Commodity importers

Other
China's growth excluding investment
China's investment
Actual

-4
-5
2010

2011

2012

2013

2014

2015

Sources: Haver Analytics, International Monetary Fund, Oxford Economics, World Input Output Database, World Bank estimates.
C. Cumulative impulse response of weighted average EMDE output growth after 1 year to a 1 percentage point decline in growth in real investment, real exports,
and real GDP in China. Investment spillovers based on a Bayesian vector autoregression of world GDP growth (excluding China), the U.S. 10-year sovereign bond yield,
JP Morgan’s EMBI index, growth in the non-investment component of China’s real GDP, China’s real investment growth, and real GDP growth in the spillover destinationgroup. Oil price is exogenous. Exports and real GDP replace real investment in models that estimate spillovers from exports and output. Sample includes 18 EMDEs
from 1998Q1-2016Q2. Blue bars denote 16th-84th percentile confidence interval, red dots denote median of posterior distribution.
D. Historical contribution of China’s investment and non-investment growth based on model used for Figure C. Line denotes unweighted average demeaned
GDP growth.

EMDEs’ annual output growth by as much as 0.8
percentage point on average (Figure 3.3.2).
Policies to support an orderly rebalancing
of investment
A slowdown in China’s investment growth has beennecessary to ensure sustainable growth. However, theconcentration of the slowdown thus far in private
investment raises concerns about growth prospects. Weakprivate investment lowers prospects for potential output
growth, which is already under pressure from a shrinking
working-age population and slowing total factor
productivity growth. Potential growth is expected to slow
from 10.6 percent in 2010 to 6 percent in 2020.

217

218

CHAPTER 3

BOX 3.3 Investment slowdown in China(continued)
In rebalancing the economy from investment-led towards
more sustainable growth, the authorities face two challenges:
to sustain private investment growth and to limit adverse
spillovers from slowing private investment growth to otherparts of the economy. Following an in-depth study in sevenprovinces, the government announced a range of measuresover the past two years. These include efforts to facilitate
entry by private firms in a broader range of sectors; and topromote public-private partnerships in activities accountingfor 14 percent of 2016 GDP. To ease concerns about the
inefficiency of public-private partnerships and limited accessfor private firms to such projects, the government is drafting
regulations to protect private investors in the partnerships. In
the short term, this may be complemented by monetarystimulus and tax reductions to encourage private investment.

Conclusion
A policy-driven slowdown in investment growth has been
underway in China since 2012. This has weighed on global
output growth, especially in commodity-exporting EMDEs.
China’s investment slowdown has been accompanied by aparticularly sharp decline in investment growth in private
enterprises, reflecting deteriorating business confidence andweakening return prospects. The slowdown in private
investment raises concerns about potential growth prospects,
against the backdrop of an aging population and slowing
productivity growth. Policies to rekindle private investment
include, in particular, measures to facilitate market access by
private firms.

private investment growth since 2008 (Figure3.15). In EMDEs, the broad-based countercyclical surge in public investment in 2008-09
offset a significant slowdown in private investment
growth. Post-crisis, this was followed by a periodof easing public as well as private investment
growth. In the majority of EMDEs, public andprivate investment growth have both been below
their long-run averages since 2010 (Box 3.4).
Policymakers can use public investment in three
ways to lift overall investment and output. First,
public investment can raise domestic demand as
part of fiscal stimulus. Second, a shift ingovernment expenditures toward investment awayfrom less efficient expenditures can makegovernment operations more growth-friendly.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Alternatively, revenues can be raised—preferably
in ways that do not discourage investment—tofinance public investment while containing fiscal
deficits. Third, even within an existing envelope of
public investment spending, spending efficiency
can be improved to increase the benefits to growthfrom public investment.
Counter-cyclical fiscal stimulus.
Growthprospects play a major role in investment
decisions. To the extent that the EMDE growth
slowdown since 2010 is cyclical, fiscal stimulus
can help raise growth and investment where there
is policy space (Didier et al. 2015). The current
low-interest rate environment offers a rareopportunity to implement fiscal stimulus withlimited impairment of long-term fiscal
sustainability (Kose et al. forthcoming; OECD
2016c). Provided there is sufficient fiscal spaceand economic slack, and that measures areintegrated into a credible medium-term fiscal
framework, fiscal stimulus can support output
growth (Huidrom, Kose, and Ohnsorge 2016).
In order to analyze the implications of expansionin public investment for activity and private
investment, a vector autoregression model isestimated for eight EMDEs with available data,for 1998Q1-2016Q2. Details of the estimation
are presented in Annex 3.2D. A 1 percent increasein public investment raises private investment
about 0.26 percent above the baseline after justover a year (a temporary “crowding-in” effect).
Thereafter, however, this positive effect dissipates
and private investment returns toward the baseline(Figure 3.16).
Although the availability of cheap financing fromglobal markets makes it relatively easier toundertake fiscal stimulus programs, most EMDEs
have limited fiscal space for expansionary policy,
given debt burdens and sizable deficits (Chapter 1;
Figure 3.17). In addition, cyclical policies forcommodity exporters may be ineffective if they
face persistent terms of trade shocks.
Expenditure reallocation or revenue increases.
Absent room for fiscal stimulus, spending on
public investment can also be boosted byreallocating expenditures towards growth-

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017219

CHAPTER 3

enhancing investment at the expense of
expenditures that are less clearly aligned with
policy priorities. Such offsetting expenditure cuts
could be identified in periodic Public Expenditure
Reviews that assess all government expenditures
against policy priorities (for example, World Bank
2015e; 2016c-d). Alternatively, domestic resources
could be mobilized through increased revenue
collection, whether by strengthening tax
administrations, broadening tax bases, or raising
tax rates. Revenue-to-GDP ratios are particularly
low in South Asia and Sub-Saharan Africa (Box2.6; World Bank 2015b, 2016e). Even absent
hikes in tax rates, efforts to remove exemptions,tighten tax administration, and broaden tax bases
could yield revenue gains that could increase
resources to finance public investment projects.

FIGURE 3.14 Labor productivity, TFP, and investment

C. Changes in TFP and investment
growth, 2010-15

D. Differential between EMDEs andAEs in per capita investment and GDP
growthExpenditure efficiency. Even if the resourceenvelope for public investment cannot be
increased, public investment can be turned more
effective in reaching policy priorities bystrengthening expenditure efficiency (Buffie et al.
2012). EMDEs in Sub-Saharan Africa and South
Asia consistently score lowest among EMDE
regions in indicators of efficiency of education andhealth care systems (Herrera and Pang 2005).
Measures can be taken both on the revenue andthe expenditure side to raise public spending
efficiency. On the revenue side, output-based
funding rules can strengthen incentives for
ensuring greater efficiency. On the expenditureside, medium-term budget frameworks canimprovespending
predictability;
greatertransparency of expenditures and independent
spending evaluations can improve incentives totighten efficiency; and better coordination
between different levels of government can reduce
duplication and inconsistencies (Mandl, Dierx,
and Ilzkovitz 2008; St. Aubyn et al. 2009).12

Percentage points

Percentage point

Expenditure efficiency has also been prioritized by
G20 policymakers (G20 2015). Policy
commitments among G20 countries include
efforts to strengthen cost-benefit analyses andneeds assessments, improve prioritization, increase

12The disconnect between spending and asset accumulation of
infrastructure services is particularly acute when governance and fiscal
institutions are weak (Keefer and Knack 2007).

Slowing capital accumulation and total factor productivity growth havelowered EMDE income catch-up and labor productivity growth. Labor
productivity growth has slowed in EMDEs since the crisis, most markedly
in economies with relatively low investment growth.
A. Catch-up to U.S. per capita income

100

3

80

2

60

1

40

0

20

-1
-2

30

2015

2014

2013

2012

2011

2010

2009

2008

Investment per capita

20

20

2007

-3

2006

EMDE
commodity
importers

2005

EMDE
commodity
exporters

2004

EMDEs

2003

0

GDP per capita

15

10

10

0

5

-20

0

-30

-5

E. Labor productivity growth in
EMDEs

F. Labor productivity growth in
EMDEs with high and low investment
growth, 2010-15

Percent
12

Percent

10

Percent
Investment growth
6
Labor productivity growth (RHS)
5

8

4

6

3

4

2

1

2

1

0

0

0
2010 2011 2012 2013 2014 2015

2015

2012

2009

-10

2006

10

2003

-10
-5
0
5
Change in TFP growth

2000

-15

1997

-40

1994

-10

1991

Change in investment growthCommodity importers
Commodity exporters
Dashed lines: Long-term
average

Percent
4

1993-2008
2003-08
2013-15

Number of years120

B. Average TFP growth

43
2

Low investment
growthHigh investment
growthSources: Haver Analytics, International Labor Organization, International Monetary Fund, Penn World
Table, World Bank.
A. Number of years needed to catch-up with 2015 real per capita GDP level in the United States,
assuming average growth rates over each period denoted for each group.
B. Unweighted averages. TFP calculated as residual from the growth-accounting framework in Didier
et al. (2015). Dashed lines indicate long-term average for 1990-2008 for each respective group.
C. Correlation of change in investment growth from 2010-15 with change in TFP growth over thesame period. Red dotted line denotes the linear regression line. Includes 40 EMDEs.
D. Weighted averages. Difference between EMDEs and AEs. The shaded areas are global
recessions and downturns.
E. Weighted averages. Labor productivity is defined as real output per person engaged.
F. “Low” and “High” indicate annual growth rates in real investment in the bottom and top one-third of
the distribution, respectively. Difference in medians between “high” and “low” subsamples issignificant at the five percent level. Group medians for 123 EMDEs during 2010-15.

220

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.15 Public and private investment
In EMDEs, both public and private investment have declined from 2009-10
peaks. In AEs, post-crisis public investment contracted as private
investment growth stabilized and picked up.
A. Public investment growth

B. Private investment growth

Percent

Percent

10
5
0
-5

2008
2009
2010
2011
2012
2013
2014
2015

2008
2009
2010
2011
2012
2013
2014
2015

-10

AEs

EMDEs

Infrastructure
investment.
Infrastructure
investment gaps are sizable (World Bank
2016b, Figure 3.18).15 Investment ininfrastructure not only raises investment
directly, but can also crowd in private
investment, under the right conditions.
Crowding-in of private investment is more
likely if public investment occurs amidst
economic slack and accommodative financial
conditions, if there are sizable infrastructure
gaps impeding private investment, and if it is
implemented in a strong institutional
environment with sufficient trade andfinancial openness (Kessides 2004; Box 3.4).

•

2008
2009
2010
2011
2012
2013
2014
2015

15

1990-2008 average
2003-08 average

20
15
10
5
0
-5
-10
-15

2008
2009
2010
2011
2012
2013
2014
2015

1990-2008 average
2003-08 average

20

and above the average EMDE investment of 24
percent of GDP during 2010-15 (UNCTAD
2014).13 While specific investment priorities vary
widely across regions (Boxes 2.1.1-2.6.1),
investments in infrastructure as well as in humancapital, in particular health and education, foster
long-term prospects for inclusive growth.14

AEs

EMDEs

Sources: Eurostat, General Statistics Office of Vietnam, Haver Analytics, International Monetary
Fund, Ministry of National Economy of the Republic of Kazakhstan, OECD, Reserve Bank of India,
Sri Lanka Ministry of Finance, World Bank.
A.B. Public and private investment growth rates are weighted averages of gross fixed capitalformation growth rates in the public and private sectors, respectively, in constant 2005 U.S. dollars.
The sample includes 20 advanced economies and 99 EMDEs from 1990 to 2015.

FIGURE 3.16 Public investment and growth
Public investment boosts output growth and crowds-in private investment,
but the effects dissipate after about two years.
A. Cumulative impact on output of a 1
percent increase in public investment

B. Cumulative impact on private
investment of a 1 percent increase inpublic investment

Percent deviation from the baseline
0.3

Percent deviation from the baseline
0.8

Investment in public infrastructure can spark
large benefits. In particular, it can encourage
urbanization in EMDEs by expanding market
access, improving the delivery of services,
fostering innovation, or reducing transportation costs (Sokoloff 1988; Citigroup2016). Urbanization, in turn, has been
associated with higher growth of output aswell as labor productivity (Glaeser 2008;
World Bank 2009; Dasgupta, Lall, andLozano-Gracia 2014). Infrastructure capital
appears to be inversely correlated with income
inequality among EMDEs, although the

0.6

0.2

0.4
0.1

0.2
0.0

0.0

-0.2
-0.1

-0.4

-0.2

-0.6
1

3

5

7

9 11 13 15 17 19
Quarter

1

3

5

7

9 11 13 15 17 19
Quarter

Sources: International Monetary Fund, World Bank estimates.
Notes: The graphs show the cumulative impulse responses (percentage points) of output and private
investment due to a positive shock to government investment, based on a sample of 8 EMDEs for
1998Q1-2016Q2.Variables included are, in this ordering, real government investment, real GDP¸ real
private investment, current account balance, and the real effective exchange rate. The shock size issuch that government investment increases by 1 percent from the baseline on impact. Solid lines
represent the median, and dotted bands are the 16-84 percent confidence bands.

the focus on investment quality, improvecoordination of investment plans and reduce
duplication, and increase transparency.
Addressing substantial investment needs.
Regardless of the sources of financing,considerable investment is needed in all EMDE
regions to meet the demands of rapid urbanizationand growing activity, as well as to achieve theUNDP’s Sustainable Development Goals. In total,such investment needs amount to about 1.9-3.1
percent of GDP per year during 2015-30, overAschauer (1989); Fernald (1999); Czernich et al. (2011).
Where investment needs are large relative to public financial
resources and institutions are robust, public investment can leverage
private investment in public-private partnerships (PPP). Currently,
the share of the private sector in infrastructure investment is 30-80
percent, depending on the industry, in developing countries(UNCTAD 2014). However, the share of the private sector in
education and health investment in developing countries is modest at
15 and 20 percent, respectively. The challenges to designing effective
PPPs are summarized in Bloomfield (2006) and Pongsiri (2002). The
beneficial effects of public investment projects can be especially large
when the economy’s stock of infrastructure capital is relatively low(Calderon, Moral-Benito, and Serven 2015).
15Even in OECD countries, sizable infrastructure gaps remain tomaintain, improve, and expand energy, water, and transportation
infrastructure (IEA 2014; OECD 2015a,b).
13

14

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.4 Interactions between public and private investment
Both public and private investment have decelerated in EMDEs since the global crisis. Although the effect of public investment on
private investment has been mixed, the impact is more likely to be positive in the presence of economic slack, accommodative
financial conditions, sizable investment needs, sound institutions, and available skilled labor. The effect on private investment isuneven, but public investment generally does not “crowd out” private investment.
Public investment accounted for 31 percent of total
investment in EMDEs and 15 percent of total investment
in AEs, on average, over the period 2010-15. Initiatives toboost public investment, including as part of a fiscal
stimulus, could therefore directly lift GDP considerably. In
addition to this direct effect on activity, public investment
has at times proven a catalyst for private investment.
This Box analyzes recent trends in public and private
investment and the effects of public investment on private
investment and growth. In particular, it addresses thefollowing questions:•

How have public and private investment evolved sincethe 2008-09 crisis?

•

What are the macroeconomic implications of public
investment?

•

Which policies can increase the benefits of public
investment?

The box documents the weakening public and private
investment growth in EMDEs. An extensive literaturesuggests that public investment can significantly raise
output and trade and help support better infrastructure. In
addition, it is associated with lower income inequality. The
evidence on the impact of public investment on private
investment, in contrast, is mixed. Policy measures can be
implemented to increase the benefits from public
investment and mitigate fiscal pressures.
Evolution of public and private investment
since the 2008-09 crisis
Post-crisis public investment slowdown. The fiscal
stimulus implemented in many countries in 2008-09 tocounter the economic impact of the financial crisis liftedpublic investment growth above long-term averages inboth AEs and EMDEs. In AEs, this boost has subsequently
reversed: public investment contracted sharply in 2011,
while the cumulative growth rate after 2011 has remained
negative (Figure 3.4.1). In EMDEs, public investment
growth also has been weak and has remained below its long-term average, with the exception of 2012. From 2014-15,
it began to ease further. This pattern largely reflected
Note: This box was prepared by Yoki Okawa.

sizable initial fiscal stimulus and subsequent policy
tightening in large EMDEs, especially China, which
accounts for more than half of EMDE public investment.
However, in the majority of EMDEs, public investment
growth was below its long-term average throughout 201015 (Figure 3.4.2). In most regions, public investment
growth slowed from pre-crisis averages but remainedrobust above long-term averages in 2008-09. Thereafter,
investment growth slowed steadily in all regions, except
Sub-Saharan Africa (SSA), to below long-term averages.
This slowdown may partly reflect increasing financing
constraints as fiscal space eroded following fiscal stimulus
during the crisis.
Private investment growth slowdown. In AEs, public
investment moved broadly counter-cyclically with private
investment: surging during the private investment collapseof 2008-09 and contracting in the wake of the crisis asprivate investment stabilized and began to recover from its
deep 2008-09 contraction. A similar pattern occurred in
EMDEs during the recession of 2008-09, when surging
public investment offset a halving in private investment
growth to 7 percent (from 16 percent in 2006-07). Afterthe 2010 rebound, however, private investment growthslowed in synchronization with public investment growth.
In more than half of all EMDEs, private investment
growth during 2010-15 remained below the long-term
average. It was weakest in ECA, mainly as a result of
spillovers from the Euro Area crisis, and MENA, where
political uncertainty in the wake of the Arab Spring
weighed on sentiment.
Macroeconomic implications of public investment
An extensive literature, summarized in several recent survey
papers (Straub 2011; Estache and Garsous 2012; Pereira
and Andraz 2013; Bom and Ligthart 2014), has discussed
the macroeconomic benefits of public investment. Thesebenefits have included higher growth, more trade, and lessincome inequality. The effects of public investment on
private investment and public finances appear to be more
mixed.
•

Growth. Investment to build public capital lifts
growth in AEs, although estimates vary widely.
Estimates of the output elasticity of public capital
averages 0.14 but ranges from −1.7 for New Zealand221

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.4 Interactions between public and private investment (continued)
FIGURE 3.4.1 Public and private investment growth
In AEs, public investment growth has moved broadly counter-cyclically to private investment growth since 2008. In EMDEs,
the counter-cyclical public investment boost of 2008-09 offset a sharp slowdown in private investment growth, but was
followed by a period of slowing public and private investment growth. Private investment weakness was most pronounced
in BRICS and commodity-exporting EMDEs.
A. Public investment growth

B. Private investment growth

Percent

1990-2008 average

Percent

2003-08 average

20

20

1990-2008 average
2003-08 average

15
15
10
10

5

5

0

0

AEs

EMDEs

AEs

D. Contributions to investment growth

Percentage points

Percentage points
16

12
PublicPrivate

2015

2014

2013

2012

2011

EMDEs

C. Contributions to investment growth

10

2010

2009

2008

2015

2014

2013

2012

2011

2010

2008

2015

2014

2013

2012

2011

2010

2009

2008

2015

2014

2013

2012

2011

2010

-15

2009

-10

2008

-5
-10

2009

-5

PublicPrivate

12

8

8

6
4

4
2

0

0

AEs

Commodity exporters Commodity importers
excl. BRICS
excl. BRICS

EMDEs

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

2010

2015

2014

2013

2012

2011

World

2011

2010

-4

-2

2010

222

BRICS

Sources: Eurostat, General Statistics Office of Vietnam, Haver Analytics, International Monetary Fund, Ministry of National Economy of the Republic of Kazakhstan,OECD, Reserve Bank of India, Sri Lanka Ministry of Finance, World Bank.
Note: Public and private investment growth rates are weighted average of gross fixed capital formation growth rates in the public and private sectors, respectively, inconstant 2005 U.S. dollars. The sample includes 20 advanced economies and 99 EMDEs for 1990 to 2015.

to 2.0 for Australia. Estimates of the long-run effectare about three times estimates of the short-run
impact. Local government capital generates somewhat
higher output gains than central government capital,
with considerable cross-regional spillovers (Pereira
2000; Bom and Ligthart 2014). Estimates of theoutput elasticity of public investment are typicallysmaller for EMDE than for AEs, possibly reflecting
the heterogeneity within the former group (Straub
2011; Kraay 2014). Estimates of the output elasticity

of infrastructure capital are somewhat higher thanthose for general public capital. In EMDEs, the levelof infrastructure capital can have a sizable effect onlabor productivity. The higher infrastructure capital ofupper-middle income EMDEs (relative to lowerincome EMDEs) increases output per worker by 5.2
percent in the long run (Calderon et al. 2015).
•

Links between public and private investment. The
impact of public investment on private investment

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

BOX 3.4 Interactions between public and private investment (continued)
depends on the presence of economic slack, thestances of fiscal and monetary policy, possible
financial market reactions, the magnitude ofinvestment needs as well as the institutional andphysical environment. Public investment that
increases the fiscal deficit in an environment of tightmonetary policy, large government debt, and limited
economic slack can “crowd out” private investment(Mankiw 2012). Such crowding out has been
demonstrated in AEs (Erden and Holcombe 2005) as
well as in EMDEs that are not open to trade andfinancial flows, have weak institutions, or small skilledlabor forces (Cavallo and Daude 2011; Warner 2014;
Presbitero 2016). In contrast, public investment has
been found to “crowd-in” private investment (throughpositive effects on prospective demand and activity,and increased investor confidence) in some EMDEs,
including the lowest-income countries and those withstronger institutional safeguards but sizableinfrastructure needs (Cavallo and Daude 2011; Dreger
and Reimers 2014; Eden and Kraay 2014; Bahal et al.
2015; Cerra et al. 2016).
•••

Trade. Better public infrastructure, especially tradefacilitating infrastructure, can increase international
trade. Improved port and airport facilities andtelecommunication quality raise export and import
volumes significantly (Nordas and Piermartini 2004;
Ismail and Mahyideen 2015). By one estimate,bringing the trade-facilitating infrastructure of belowaverage member countries of the Asia Pacific
Economic Cooperation Forum (APEC) to half the
APEC average increased intra-APEC trade by about
10 percent (Wilson et al. 2002).
Income inequality. Infrastructure capital and income
inequality are negatively correlated in both AEs and
EMDEs (Calderon and Serven 2014), although thepresence of a causal relationship is still debated.
Enhanced public infrastructure may reduce income
inequality as well as promote growth if it benefits thepoor more than proportionally (Ferreira 1995;
Getachew 2010; Fournier and Johansson 2016).
Fiscal space. Increased public expenditure can put
pressure on government finances, at least in the shortrun and especially if the government already has asizable deficit or debt. In the long-run, well-executed
high-yielding public investment programs, including
in low-income countries, can generate tax revenues
that exceed their initial cost, especially if the financing
cost is low (Buffie et al. 2012). For AEs with

FIGURE 3.4.2 Comparison of public andprivate investment growth with long-term
average
In the majority of EMDEs, both public and private
investment growth since 2010 have been below theirlong-run averages.
A. Countries with public investment growth below 1990-2008
average
Percent
2006-072010-132014-15

100

75

50

25

0
AEs

EMDEs

B. Countries with private investment growth below 19902008 average
Percent
2006-072010-132014-15

80
70
60
50
40
30
20
10
0
AEs

EMDEs

Sources: Eurostat, General Statistics Office of Vietnam, Haver Analytics,
International Monetary Fund, Ministry of National Economy of the Republicof Kazakhstan, OECD, Reserve Bank of India, Sri Lanka Ministry of
Finance, World Bank.
Note: Public and private investment growth rates are weighted average ofgross fixed capital formation growth rates in the public and private sectors,
respectively, in constant 2005 U.S. dollars. The sample includes 20
advanced economies and 99 EMDEs for 1990 to 2015. Figures show theshare of EMDE and AEs (in percent) in which public and private investment
growth was below the 1990-2008 average during the periods specified. Line
indicates half of the sample.

223

224

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

BOX 3.4 Interactions between public and private investment (continued)
weighed against long-term returns. Even efficient and,over the long-term, self-financing public investment
projects may pose short-term fiscal challenges.
External financing, especially through concessionalloans, can mitigate short-term domestic financing
constraints (Buffie et al. 2012). Well-designed public
private partnerships, particularly with foreign private
sectors, can help reduce fiscal pressure as well.
Developing and strengthening a pipeline ofinfrastructure investment projects can attract investors
with lower costs (McKinsey Global Institute 2016).

economic slack and accommodative monetary policy,
infrastructure investment can also be self-financing
over the long-run (Abiad et al. 2015; Holtz-Eakin and
Mandel 2015). However, if the productivity of public
investment is low, for example because of an alreadyhigh stock of public capital, it is likely to leave a longterm legacy of higher debt (Holtz-Eakin and Mandel
2015; ECB 2016).
Policies to increase the benefits of public
investment••

Improve efficiency of public investment. The difference
between the output and revenue gains associated withpublic investment and its fiscal cost can be made morefavorable by strengthening the efficiency of public
investment. Public investment is generally lessefficient in EMDEs than in AEs (Albino-War et al.
2014; Dabla-Norris et al. 2012). Its efficiency can beincreased in EMDEs through a strategically planned,
well-prioritized, rigorous and transparent project
selection process and through strengthened
institutions to fund, manage, execute, and monitor
project implementation (Albino-War et al. 2014; IMF
2015; Rajaram et al. 2010).
Mitigate short-term fiscal pressure. Public investment
and public infrastructure investment, in particular, ischaracterized by large initial expenses that need to beConclusion
Post-crisis, slowing public investment growth in EMDEs
has accompanied a steady decline in private investment
growth. Public investment can raise output in the short
run as well as in the long run, and stimulate trade. Public
infrastructure is negatively related to income inequality,
although the presence of a causal relationship remains
debated. Evidence on the effects of public investment on
private investment is mixed. However, public investment ismore likely to crowd in private investment in the presenceof economic slack, accommodative financial conditions,sizable investment needs, well-developed institutions, and a
sufficiently skilled labor force. Improved project selection
and monitoring, as well as better governance, may enhance
the benefits from public investment.

direction of causality remains a matter of
debate (Ferreira 1995; Getachew 2010;
Calderon and Serven 2014).
•

Health investment. Gaps in health investment
relative to the levels needed to reachsustainable development goals remain
substantial (UNCTAD 2014; Wagstaff,
Bredenkamp, and Buisman 2014). Investment
in health yields both microeconomic andmacroeconomic benefits that are associatedwith aggregate gains in human welfare.
Healthier individuals are more productive,
better at creating and adapting to newtechnologies, and inclined to invest more ineducation (Aghion, Howitt, and Murtin2011). They also have a longer life expectancy
and are likely to save more, which feeds backinto investment (Zhang et al. 2003). This

relationship holds across and within countries
and for numerous measures of healthoutcomes (Weil 2014). At the macroeconomic
level, better health outcomes are associatedwith higher growth.16 By one estimate, a 1year improvement in a population’s life
expectancy is associated with 4 percent higher
output (Bloom, Canning, and Sevilla 2004).
•

Educational investment. Education investment
gaps relative to the Sustainable Development
Goals also remain sizable (UNCTAD 2014).
Yet education investment that improves
worker skills or reduces skill mismatches canraise worker incomes and productivity, as well
as benefit firms. For individual workers, the16World Bank (2007); Barro (2013); Baker et al. (2014); Barroand Lee (2015).

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017average rate of return to another year of
schooling is estimated to be a 10 percent
increase in their lifetime labor market earnings(Montenegro and Patrinos 2014). For firms, abetter match of worker skills to technologicalneeds accelerates firms’ pace of technology
absorption and expansion (Winthrop et al.
2013). This is also reflected in the positive
impact of education investment on growth inmacro-level regressions.17

FIGURE 3.17 Fiscal and monetary policy space

Clean energy investment. Progress in achieving
the United Nation’s Sustainable Energy for
All Initiative objective remains slow (WorldBank 2015f). Annual investment in clean
energy is estimated to be about one-third ofthat required to achieve the initiative’s goals.
Yet clean energy technologies can generate
more employment than traditional energy
sources and energy-saving technologies can beproductivity-enhancing (Wei, Patadia, andKammen 2010; Adhvaryu, Kala, andNyshadham 2016).

-2

EMDEs typically have less developed financial
systems than AEs, which limits the transmission ofmonetary policy. EMDE policymakers face avariety of challenges that differ significantly fromthose facing their counterparts in AEs: a
17By one estimate, 1 additional year of male upper-level schooling
can raise growth by 1.2 percentage points per year (Barro 2013).
Jones (2003) theoretically shows how educational attainment can beinterpreted as an investment rate.

B. Gap between inflation and inflation
targetPercent of GDP
Commodity
6
exporters
4
Commodity
2
importers0

Percentage points
25

Percent of GDP
60
50

20

40

15

30
20

-4

10

-6
-8

0
2007 2010 2016 2007 2010 2016
Balance (LHS)

Range

Median

Mean

10
5
0
-5
-10
Apr-16 Jul-16 Latest Apr-16 Jul-16 Latest

Debt (RHS)

Commodity exporters

Commodity importers

Sources: Central Banking News, Haver Analytics, International Monetary Fund.
A. “Balance” stands for fiscal balance and reflects the unweighted average of 89 commodity-exportingand 62 commodity-importing EMDEs. “Debt” stands for general government debt and reflects
unweighted average gross government debt of 86 commodity-exporting and 61 commodity-importing
EMDEs.
B. Figure includes 22 commodity-exporting and 18 commodity-importing countries with a statedinflation target and for which current inflation data is available. Latest observation is for Nov 2016.

FIGURE 3.18 Infrastructure, education, and healthinvestment needs
Substantial gaps in infrastructure, education, and health investment needs
remain across the world.
A. Global infrastructure investment
gap
0.58

Percent of global GDP

B. Investment gaps in reaching SDG

3.5

0.71
0.75

1.01

0.12
0.27 0.04

US$, billions
1,600

Investment gap, average 2015-30

1,200

Investment, 2014

800
400

Education

HealthWater and
Sanitation
Food
security
ClimatechangeTransport

Telecoms

Power

Total

Telecom

Water

Power

Airports

0

Ports

Like fiscal stimulus, monetary policy can boost
growth and investment in a cyclical slowdown.
The room to employ monetary policy in the shortrun varies significantly across emerging economies.
Most commodity-exporting EMDEs have limitedmonetary policy space as inflation is already above
target (Figure 3.17). A number of commodityimporting EMDEs (especially in Central andSoutheastern Europe, and in South and East Asia)
have below-target inflation and thus have someroom to counteract shocks with further interest
rate cuts. However, this room may narrow oncemonetary policy tightens in major advanced
economies.

A. Government debt and fiscal
balanceRail

Monetary policy

Elevated debt and wide fiscal deficits restrict the use of counter-cyclicalfiscal stimulus in a number of EMDEs. Above-target inflation, especially inmany commodity-exporting EMDEs, constrains the use of monetarystimulus.

Roads

•

225

CHAPTER 3

Sources: UNCTAD (2014), World Bank (2016b), World Bank estimates.
A. The figure shows global investment in infrastructure (as percent of GDP) required over 2015-30, as
projected by McKinsey Global Institute.
B. Investment refers to capital expenditure. Upper bounds for the estimated investment needs arereported. Red column denotes 2014 or latest available year. SDG refers to the United Nation’s
Sustainable Development Goals.

susceptibility to rapid reversals in capital flows andthe risks of contagion and full-blown financial
crises; a limited influence on global markets
combined with time-varying external credit
constraints; generally limited ability to borrowinternationally in domestic currency; themanagement of generally large international
reserves; and higher degree of pass-through fromexchange rate fluctuations to domestic prices(Chinn 2014; Mishra et al. 2014).

226

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

FIGURE 3.19 Investment and governance reform
Reform spurts are significantly associated with higher investment growth.
Since 2011, improvements in the business climate have continued, but at a
slower pace.
A. Growth differentials during reformspurts and setbacks
Growth differential, in percentage points
6

B. Distance to frontier of Ease of
Doing BusinessDistance to frontier score
80

3

60

0

40

-3

20

-6
Reform spurt

Reform setback

2004

2005-2010

Time

Cost

(domestic and FDI) and amplify the crowding-in
effects of public and foreign direct investment—inaddition to indirect benefits through higher
growth, less informality, and more dynamic job
creation (Didier et al. 2015).18 Business climate
improvements include:•

Lower startup costs are associated with higher
profitability of incumbent firms, greater
investment
in
information
andcommunications technology, and more
beneficial effects of FDI for domestic
investment.

•

Reforms to reduce trade barriers can encourage
FDI and aggregate investment.

•

Corporate governance and financial sector
reforms can improve the allocation of
resources, including capital, across firms andsectors.

•

Labor and product market reforms that increase
firm profitability can encourage investment.

•

Stronger property rights can encourage
corporate and real estate investment.

•

Improved access to power supplies can increase
firm investment and productivity.

2011-2016

0
Procedure

Sources: Doing Business Report, World Bank; Worldwide Governance Indicators, World Bank; Haver
Analytics; World Economic Outlook, International Monetary Fund.
A. The columns show the cumulative investment growth differential of economies during an reformspurt or setback episode, relative to those that experienced neither spurts nor setbacks. Spurt(setback) is defined by a two year increase (decrease) by two standard deviations in one or more ofindexes of regulatory quality, government effectivness, rule of law, and control of corruption.
Differentials are based on estimates from a panel data regression with time and country fixed effects.
The sample includes 75 reform spurt episodes and 71 reform setback episodes among 97 EMDEs
over 1996-2015. The growth differential during reform spurt episodes is significant at the ten percent
level. See Annex 3.2E for more details.
B. Indicates proximity in score to country with the highest-ranking (best) scores for Ease of Doing
Business across all time periods with available data. A higher distance to frontier score (DTF)
indicates an easier business environment. Unweighted averages of 117 EMDEs. “Time” refers to theaverage DTF of the time to start a business, obtain construction permits, connect electricity,
registering property, paying taxes, and enforcing contracts. “Cost” refers to the average DTF of thecosts to starting a business, connect electricity, registering property, and enforcing contracts.
“Procedure” refers to the average DTF of the number of procedures to starting a business, obtain
construction permits, connecting electricity, and registering property. Blue column denotes the DTF
level in 2004. The red and orange columns denote the change in DTF over the respective periods.
Each year denoted refers to June of previous year to June of current year.

Structural reforms
The environment for EMDE investment growth islikely to remain challenging. AE growth isexpected to remain subdued (Chapter 1).
Commodity prices are forecasted to rise only very
gradually as excess supply, accumulated withstrong pre-crisis investment in natural resources, isunwound slowly (World Bank 2016a). As
monetary policy in AEs is expected to graduallynormalize over the next few years, financing
conditions could tighten and capital flows to
EMDEs may ease. To offset these challenges,
sustained improvements in the business climate
and labor and product markets are needed tostimulate private investment.

The panel regression aforementioned suggests thatpast major reform spurts in EMDEs have been
associated with higher investment growth. This isalso apparent in an event study of large spurts andsetbacks in reforms among 97 EMDEs during
1996-2015 (Figure 3.19).19 Details of theapproach are discussed in Annex 3.2E. Reformspurts were associated with significantly higher (bymore than 4 percentage points) investment
growth, on average, in the period of the reform.

Efforts to increase public investment are mosteffective in stimulating private investment andgrowth when implemented in a conducive
business environment. Improvements in thebusiness climate can both stimulate investment

18For the linkages between these reform measures and investment
growth, see Reinikka and Svensson (2002); Field (2005); Wacziarg
and Welch (2008); Schivardi and Viviano (2011); Munemo (2014);
Corcoran and Gillanders (2015); Calcagnini, Ferrando, Giombini(2015); and Andrews, Criscuolo and Gal (2015).
19In the period of the Great Moderation, about half of governancespurts occurred in commodity importers.

Progress in improving business climates has
slowed in EMDEs since 2011. During theGLOBAL ECONOMIC PROSPECTS | JANUARY 2017preceding six years, the cost of doing business,compliance times to meet regulations, and thenumber of regulatory procedures were cut
considerably. On average, EMDEs move 6-10
percent closer to best practices in these
dimensions. Since 2011, however, improvements
have continued in EMDEs but, on average, at a
slower pace (Figure 3.19). (That said, some
EMDEs, including China and a number of
EMDEs in Europe and Central Asia, and SubSaharanAfrica,have
accelerated
theirimprovements in business climates.)
Policymakers in G20 countries have identified
nine structural reform priorities. These include
promoting trade and investment openness;advancing labor market reform, educational
attainment, and skills; encouraging innovation;
improving infrastructure; promoting fiscal reform;
promoting competition and an enabling
environment; improving and strengthening thefinancial system; enhancing environmental
sustainability; and promoting inclusive growth(G20 2016b). Measures that particularly benefit
investment include, for example, harmonizing
cross-border regulations; easing or simplifying
product market regulations; and leveling theplaying field between private and state-owned
enterprises (G20 2015). In addition, public
investment is to be complemented by measures tostrengthen private investment (e.g., promotion ofparticipation of private investors in public-private
partnerships).
Trade and integration agreements
candemonstrate a binding commitment to reforms
that will have the collateral benefit of improving
the investment climate (Kose et al. 2009; Mody
and Murshid 2005). Under an enhanced
investment climate, stronger investment would
also improve trade flows, as investment weakness
has been a major driver of the recent slowdown inglobal trade. Regional trade agreements can help
lower nontariff barriers and, thus, encourage FDI
and deepen supply chain integration (World Bank
2016a; Petri and Plummer 2016). To besustainable, these agreements need to be supported
by measures to compensate vulnerable groups ofsociety that could be adversely affected.

CHAPTER 3

Conclusions
Relative to double-digit highs before the global
financial crisis, investment growth in EMDEs has
slowed considerably and steadily, from 10 percent
in 2010 to 3.4 percent in 2015. The mostpronounced slowdowns have taken place in
BRICS and in commodity-exporting EMDEs.
Investment growth is now below its long-term
average in the largest number of EMDEs over the
past quarter century, except during periods ofserious global downturns. Long-term investment
growth expectations have repeatedly been scaled
back, possibly in recognition of considerablyslower post-crisis output growth prospects, withknock-on effects on investment.
Slowing domestic activity, deteriorating terms oftrade (for commodity exporters), rising private
sector debt burdens, growing uncertainty, andslowing FDI inflows (for commodity importers)
have contributed to the slowdown in investment
growth. This contrasts with investment growth inAEs, which has been anemic largely on account of
weak activity and softening growth prospects.
Policies to address the EMDE investment
weakness include both direct and indirect
measures. Public investment directly lifts overall
investment, and improvements in its delivery
increase its benefits to growth. It can also foster
private investment, at least in the presence ofeconomic slack, sizable infrastructure needs, andsound governance. Finally, public investment may
have the collateral benefit of reducing income
inequality. More indirectly, cyclical and structural
policies to strengthen growth prospects—a key
driver of investment—stimulate investment. Thesemay include cyclical stimulus in countries where
activity is weak for cyclical reasons and which havethe available policy space. Most importantly,
structural reforms to improve governance could
encourage investment, foreign direct investment,
and trade, and thereby improve longer-term
growth prospects.

227

228

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

ANNEX 3.1 Determinants of investment:
Empirical framework
Framework. As in Hall and Jorgenson’s (1967)
seminal work, private investment is modelled as
the level of private investment Ip chosen such thatthe marginal return on capital (MPK) equals thecost of capital, which consists of the real interest
rate r and the rate of depreciation of capital (δ):
MPK = r + δ
As a result, private investment Ip also depends onthe determinants of the marginal product of
capital—especially total factor productivity TFP,
the existing stock of private capital Kp, and theavailability of complementary public capital Kg. In
the presence of uncertainty, the cost of capital
include a risk premium π :Ip = Ip(TFP, Kg, Kp, r, π , δ)Higher cost of capital—whether due to higher risk
premia or higher risk-free real interest rates—
would reduce investment, whereas higher
productivity and complementary public capitalwould raise it. In the data used in this study, thedistinction between private and public capital is
not available for a broad set of countries. Hence,
the analysis is based on aggregate investment I,
including both private and public investment.
I = I(TFP, K, r, π , δ)
The investment growth regression employed in
the chapter includes explanatory variables asproxies for elements of this equation. The returns
to capital (MPK) are proxied by output growth
and terms of trade growth. The risk premium is
proxied by measures of political uncertainty andfinancial market uncertainty. The cost offinancing investment is proxied by FDI inflows,
private credit, and the business climate.
These explanatory variables are also used in an
extensive literature that has examined thedeterminants of investment growth. These include
weak output growth, the terms-of-trade shocks
caused by the slide in commodity prices since2011, slow FDI flows, and intermittent bouts ofpolitical and policy uncertainty.
Weak output growth. The weakness in investment
growth has coincided with weakness in output
growth and a deteriorating growth outlook for
EMDEs (Didier et al. 2015). The growth
slowdown in EMDEs has reflected both structural
factors and cyclical components. Weak growthprospects signal reduced opportunities for firms
selling their goods and services and thus lead tolower investment. This is captured in the“accelerator model,” which assumes that firms aim
to maintain a constant capital-to-output ratio, inline with their expectations of future output
growth (Jorgenson 1963; Jorgenson and Siebert1968). Recent work on advanced economies has
shown that output growth captures broad trends
in investment, but actual investment often falls
short of the model predictions.1 In the regression,
weak growth prospects are proxied by lagged
output growth to reduce concerns about
endogeneity.2
Terms of trade movements. Sharp decreases incommodity prices have caused large post-crisis
swings in terms of trade (Baffes et al. 2015).
Terms of trade developments shape growthprospects for both commodity exporters andimporters. In commodity-exporting economies,
the terms of trade movements are dominated bycommodity price fluctuations. Weaker terms oftrade decreases return to investment, especially incommodity-related projects, and, by reducing
firms’ net worth, tighten their financial
constraints.
1Lewis et al. (2014); Barkbu et al. (2015); Banerjee, Kearns, andLombardi (2015); and Leboeuf and Fay (2016).
2Ideally, growth prospects would be captured by forecasts forseveral years ahead. However, these are highly endogenous toinvestment and highly correlated with FDI inflows. Alternatively, a
truly exogenous source of output growth would be used, such aschanges in public investment. However, the available panel data on
public and private investment are sparse to conduct a panel
regression. Some authors include measures of foreign demand into
similar types of panel regressions. However, when included here,
export growth is insignificant as its effect is captured by domestic
output growth.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Debt overhang. Elevated private debt may have an
adverse impact on firms’ investment for two
reasons. First, since the benefits from investment
are shared between the owner and the creditors ofleveraged firms, high debt can discourage
investment; and, second, high debt may reflect
misallocation of capital to less innovative firms.
This adverse effect is particularly pronounced forinvestment in an environment of weak growthprospects and in investment in long-lived assets,
including real estate.3 The regression includes thelagged private sector credit-to-GDP ratio to proxyfor household and firm debt burdens and thesquare of the lagged private sector credit-to-GDP
ratio to capture the balance between beneficial
effects of financial deepening and the adverse
effects of debt overhang.
Reduced FDI inflows. FDI inflows can lift growthboth by financing investment and by acting as
catalyst for additional, domestically-financed
investment. FDI may also have indirect,
productivity-enhancing “collateral” benefits (Koseet al. 2009). These include pressures for better
institutions, financial development, and morestabilizing
macroeconomic
policies.
The
absorption by domestic firms of the newtechnology, or managerial practices, introduced by
FDI can stimulate domestic investment, provided
financing is available. Forays into new export
markets by domestic firms, encouraged by FDI,
may require up-front investment. To fully harness
the benefits of FDI for investment, however, a setof conducive initial conditions are necessary.
These include a sufficiently skilled labor force thatcan readily adopt new technologies, a developed
financial system that can readily financeproductive new investment, sound institutions
that facilitate firm startup and market entry andexit, and open trade regimes that encourage
investment in industries with a comparativeadvantage.4 The regression includes the change in
3For arguments based on shared benefits from investment, see
Myers (1977); Whited (1992); Occhino and Pescatori (2010); andKalemli-Ozcan, Laeven and Moreno (2015). For misallocationarguments, see Lamont (2002); Hennessy (2004); Borio et al. (2015);
Ollivaud, Guillemette and Turner (2016); and Melzer (forthcoming).
4Borensztein, Gregorio and Lee (1998); Bengoa and SanchezRobles (2003); Kohpaiboon (2003); Alfaro et al. (2004); Busse andGroizard (2008); Kose, et al. (2009); Azman-Saini, Law, and Ahmad(2010); and Azzimonti (2016).

CHAPTER 3

FDI inflows into the reporting economy (inpercentage points of GDP) as a proxy for externalfinancing sources of investment.5
Business climate and reforms. A number of studies
have highlighted the importance of theinstitutional environment for investment. Postcrisis, private investment recovered faster incountries with more developed financial market
infrastructure, and higher institutional quality(e.g., governance quality) has been associated withhigher investment.6 To capture the businessclimate, a dummy variable is included for large
reforms (two standard deviation improvements)
captured in one of four governance indicators(regulatory quality, government effectiveness, ruleof law, and control of corruption). The World
Governance Indicators are typically highly
persistent over time. Hence, much of their crosscountry variability is captured by the country fixed
effects. Therefore, the regression analysis here
focuses on periods in which there are large,
statistically significant improvements (twostandard deviations) in any two-year period.7
Policy uncertainty. When firms are uncertain about
future demand and future policies, their expectedrisk-adjusted returns may not exceed the costs ofcapital or the returns on liquid financial assets.
This may make firms unwilling to commit toirreversible physical investment, a result found in a
number of firm-level studies on advanced
economies. In macroeconomic studies, theuncertainty generated by political risk has beenshown to weigh on investment (Box 3.2).8 The
regression includes, as proxy for political stability,
the International Country Risk Guide (ICRG)
political stability rating. A higher index indicatesgreater political stability. The ICRG political risk
index is a weighted average of ratings of
5Ideally, non-FDI capital inflows would be included. However,this would reduce the sample size by one-third because of poor data
availability pre-crisis.
6Mauro (1995); World Bank (2005); Everhart, Martinez-Vazquez
and McNab (2009); Morrissey and Udomkerdmongkol (2012); Lim(2014); and Qureshi, Diaz-Sanchez, and Varoudakis (2015).
7A similar variable can be constructed for major reform setbacks.
However, when a dummy variable for such setbacks is included in the
regression the estimated coefficient is insignificant.
8Alesina and Perotti (1996); Bloom, Bond, and Van Reenen(2007); Gilchrist, Sim, and Zakrajsek (2014); Julio and Yook (2012);
IFC (2016b).

229

230

CHAPTER 3

government stability, socioeconomic conditions,investment profile, corruption, the role of military
in politics, law and order, external and internal
conflict, religious and ethnic tensions, democratic
accountability, and bureaucratic quality.
Data. Data sources are drawn from Haver
Analytics, World Bank’s World Development
Indicators, Oxford Economics, as well as theInternational Monetary Fund. Investment growth
denotes the annual growth rate of real gross fixed
capital formation. In instances where data on grossfixed capital formation are not available, grosscapital formation is used as a proxy.
Methodology. A fixed effects panel regression isused to estimate the correlates of investment
growth in 73 EMDEs with populations above 3
million for the period 1998-2015. The
econometric framework is similar to that of Nabar
and Joyce (2009). However, the focus in thischapter is on investment growth, as a criticalcomponent of overall output growth (ultimately,
the source of rising living standards), rather thanchanges in the investment-to-GDP ratio thatwould only capture changes in investment growth
relative to output growth. This is in line withrecent studies on advanced economies (Banerjee,

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Kearns and Lombardi 2015; Bussiere, Ferrara, andMilovic 2016; Barkbu et al. 2015; Kothari,
Lewellen, and Warner 2015) or for individual
EMDEs (Anand and Tulin 2014). The results areshown in Annex Table 3.1.1. The regressions
control for sudden stops in capital inflows and forcountry-fixed effects. Since several sudden stops
occurred during global recessions and slowdowns,
they also capture the impact of these episodes.
Robustness. The choice of these explanatory
variables is confirmed by a Bayesian Model
Averaging approach (Annex Table 3.1.2). The
results are broadly robust across subsamples, to theinclusion of event dummies such as for periods oflarge political risk events, and to the inclusion of
five-year-ahead growth forecasts as additional
explanatory variables. An alternative estimation
technique, generalized method of moments, yields
similar estimates. The results are also robust to theuse of private investment growth (for a subset ofcountries and years) as the dependent variable.
The analysis here employs a parsimonious
specification to reduce collinearity between
explanatory variables. However, the results arebroadly robust to controlling for lagged public
debt, squared lagged public debt, subcomponentsof the ICRG index, and terms of trade volatility.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

231

ANNEX TABLE 3.1.1 Correlates of investment growth
(1)

(2)

(3)

(4)

(5)

(6)

VARIABLES

EMDE

EMDE:
including politicalrisk events

GMM

5-year-ahead
forecasts

AE

Privateinvestment

Lagged real GDP growth(percent)

0.429**[0.163]0.415**[0.164]0.441***[0.168]1.717[1.219]0.829***[0.157]0.381**[0.186]

Change in FDI inflows(percentage points of GDP)

0.605**[0.269]0.602**[0.271]

0.468**[0.232]0.179[0.158]0.145***[0.049]0.997***[0.342]

Political stability

0.473***[0.138]0.405***[0.140]0.297**[0.145]0.602***[0.172]0.017[0.116]

0.509***[0.181]

Lagged credit to GDP ratio(percent of GDP)

-0.095[0.072]-0.126*[0.074]-0.217**[0.098]-0.092[0.096]-0.029[0.053]0.018
0.079]

Lagged credit to GDP ratio, squared-0.001**[0.000]-0.001*[0.001]0.001[0.001]-0.002***[0.000]-10e-5[0.000]-0.002***[0.000]Terms of trade growth(percent)

0.131***[0.037]0.132***[0.035]0.133***[0.032]0.277***[0.069]0.026[0.119]-0.093[0.061]

Large reform spurt

4.503**[2.223]4.266*[2.232]2.862*[1.727]

3.607[3.232]-0.149[1.028]6.831*[3.744]Large deterioration inpolitical stability-3.854**[1.526]

Sudden stop dummy-4.094***[1.544]-4.059**[1.544]-5.381***[1.220]-7.495**[2.664]-4.543***[0.901]-7.151***[1.703]

Constant-19.315**[9.450]-13.811[9.585]-7.974[8.822]-33.95***[9.765]

3.162[9.781]-22.974*[11.804]

Observations

1,098

1,092

1,098

327

411

809

R-squared

0.126

0.136

0.270

0.272

0.128

Number of countries

73

73

20

26

59

73

Note: Results of a panel regression with country fixed effects for 73 EMDEs during 1998-2015. Column (1) denotes the baseline regression. All coefficient estimates (except that for thesquared credit-to-GDP ratio) are expected to be positive; the coefficient estimate for the squared credit-to-GDP ratio is expected to be negative. Column 2 controls for episodes of large
deterioration in political stability, as defined by two standard deviation below the historical mean. GMM stands for generalized methods of moments. Column 4 replaces five-year ahead
forecasts for lagged growth. AE stands for advanced economies. For the GMM regression in Column (3), the Wald chi square statistic is 84.25. Column (6) replaces dependent variable withprivate investment growth. Robust standard errors in brackets. *** p<0.01, ** p<0.05, * p<0.1.

ANNEX TABLE 3.1.2 Robustness: Bayesian Model averaging
Dependent variable: Investment growth

(1)

(2)
[1.00]

Lagged real GDP growth (percent)

0.558

Change in FDI inflows (percentage points of GDP)

0.703

[1.00]

Political stability

0.126[0.83]

Lagged credit to GDP ratio (percent of GDP)

-0.067[0.81]

Terms of trade growth (percent)

0.154[0.99]

Large reform spurt

3.017[0.53]

Sudden stop dummy
Constant
Observations-3.777-1.116
1,098[0.84][1.00]

Note: Estimation results are based on Bayesian Model Averaging. The sample is the same as in Annex
Table 3.1.1. Column 1 denotes coefficients. Column 2 denotes probability of inclusion in brackets.

232

CHAPTER 3

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

ANNEX 3.2 Definitions and methodology
A. Investment-less credit booms
Data for the broadest definition of credit areprovided by the Bank for International
Settlements for 14 EMDEs from 1980 to 2015
(Argentina, Brazil, China, Hungary, India,
Indonesia, Malaysia, Mexico, Poland, Russia,
Saudi Arabia, South Africa, Thailand, andTurkey).
For other EMDEs, where credit from thedomestic banking system remains the main sourceof credit (Ohnsorge and Yu 2016), annual data on
claims by banks on the private sector, provided by
the IMF’s International Financial Statistics, areused as proxies for credit to the nonfinancial
private sector. This broadens the sample byanother 41 countries, mainly from 2000 onwards.
These include Azerbaijan, Bahrain, Bangladesh,
Bulgaria, Bolivia, Botswana, Colombia, Chile,
Costa Rica, Cote d’Ivoire, Croatia, Egypt, Gabon,
Georgia, Ghana, Guatemala, Honduras, Jamaica,
Jordan, Kazakhstan, Kenya, Kuwait, Mauritius,
Mongolia, Namibia, Nigeria, Oman, Pakistan,Philippines, Panama, Paraguay, Peru, Qatar,
Senegal, Serbia, Tunisia, Sri Lanka, Ukraine,
Uruguay, República Bolivariana de Venezuela, andZambia.
Advanced economies (AEs) included in the sample
are Australia; Austria; Belgium; Canada;
Denmark; Finland; France; Germany; Greece;
Hong Kong SAR, China; Ireland; Israel; Italy;
Japan; Republic of Korea; Luxembourg;
Netherlands; New Zealand; Norway; Portugal;
Singapore; Spain; Sweden; Switzerland; United
Kingdom; and United States.

estimated. The results are statistically significant
within the usual 16-84 percent confidence bands.
The sample includes 18 EMDEs with available
data for key quarterly macroeconomic indicatorsand stock market indexes: Brazil, Bulgaria, Chile,
Costa Rica, Hungary, India, Indonesia, Malaysia,
Mexico, Paraguay, Peru, Philippines, Poland,
Romania, Russia, South Africa, Thailand, andTurkey. The literature on uncertainty often uses
the option-induced volatility measure VXO (e.g.,
Bloom 2009) or rich monthly macro-data (279macro and financial series in the case of Jurado,
Ludvigson, and Ng 2015) to construct uncertainty
measures. However, for many EMDEs, suchmeasures cannot be constructed.
There are two sources of uncertainty: domestic
and global.
•

Global uncertainty is captured by financial
market and policy uncertainty in the UnitedStates and the European Union (EU).
Financial market uncertainty is proxied by the
VIX for the United States and by the standard
deviation of daily stock price changes for theEuro Area. Policy uncertainty is captured by
the Economy Policy Uncertainty Index for theUnited States and the EU.

•

Domestic financial market uncertainty is
proxied by the standard deviation of dailystock market changes; domestic policy
uncertainty is proxied by the ICRG index ofpolitical risk or, for Brazil, the Economic
Policy Uncertainty Index.

Global uncertainty
B. Implications of rising uncertainty on
investment in EMDEs
To assess the role of uncertainty for EMDE
investment during 1998Q1-2016Q2, aggregate
vector autoregressive models for 18 EMDEs areapplied. Given limited data availability, the sample
varies for each indicator of uncertainty. Therefore,a series of separate vector autoregressive models are

Vector autoregressions are used to estimate theimpact of global uncertainty on EMDE
investment. The data consist of investmentweighted averages for 18 EMDEs for 1998Q12016Q2. Endogenous variables follow thisCholesky ordering: global financial market or
policy uncertainty, EMDE stock price index;
EMDE bond price index, and aggregate real

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

output and investment in EMDEs. Exogenous
regressors, included with two lags, are: G7 real
GDP growth, world stock price index, and U.S.
10-year bond yields. For the estimation of the
impact of EU uncertainty (as measured by the
EPU), the sample includes EMDEs in Europe andCentral Asia (Bulgaria, Hungary, Poland,
Romania, Russia, Turkey).1 The results are
statistically significant within the usual 16-84
percent confidence bands.
Domestic uncertainty
Country-specific vector autoregressions are used toestimate the impact of domestic uncertainty on
EMDE investment growth. The sample includes
data for the same 18 EMDEs as listed above for
1998Q1-2016Q2. The variables include, in thisCholesky ordering: global financial market
uncertainty, domestic financial market or politicaluncertainty, domestic stock prices, short-term
interest rates, and domestic real investment. G7
real GDP growth is included as an exogenous
regressor to preserve degrees of freedom. The
regression is estimated with two lags. The modelis adapted from the Bloom (2009) U.S. model,
with these changes: employment is dropped due
to data constraints, global uncertainty measures
are added, and quarterly data replaces monthly
data.
For the full sample of emerging market anddeveloping economies, on average, the impact ofdomestic uncertainty—whether financial orpolitical in nature—is insignificant throughout theforecast horizon. These results are not reported in
the text. Data for the International Country Risk
Guide variables are quite smooth; a short-term
quarterly vector autoregression model therefore
struggles to identify any significant correlations.
Economic Policy Uncertainty data show morevariance for the Brazilian economy; in these cases,
the estimated impact of domestic uncertainty (asmeasured by the EPU) on domestic investment ishighly significant.

1A similar estimation for other EMDEs yielded insignificant
results, likely reflecting weaker trade and financial links with the EU.

CHAPTER 3

C. Spillovers from the United States, theEuro Area, and China
In order to quantify spillovers from an output
slowdown in the United States and the Euro Area,a Bayesian structural vector autoregression isestimated for 1998Q1–2016Q2, using weighted
average data for 18 EMDEs. The sample includes
Brazil, Bulgaria, Chile, Costa Rica, Hungary,
India, Indonesia, Malaysia, Mexico, Paraguay,
Peru, Philippines, Poland, Romania, Russia, South
Africa, Thailand and Turkey. The regression
includes, in this Cholesky ordering: weighted
average output growth in major advanced
economies and China (excluding either the UnitedStates or the Euro Area), U.S. or Euro Area output
growth, proxies for global financial conditions(U.S. 10-year sovereign bond yield and JP
Morgan’s EMBI index), and aggregate output
growth or investment growth in EMDEs(excluding China). To conserve degrees of
freedom, oil price growth is included as an
exogenous regressor in the model.
A similar estimation is applied to estimate theimpact of a slowdown in China’s output or
investment growth on EMDE output growth. The
regression includes, in this Cholesky ordering:weighted average output growth in majoradvanced economies, proxies for global financial
conditions (U.S. 10-year sovereign bond yield and
JP Morgan’s EMBI index), China’s output growthor China’s non-investment growth and China’s
investment growth, and output growth in EMDEs(excluding China). The oil price is again included
as exogenous regressor.
D. Crowding-in of private investment by
public investment
A vector autoregression is conducted to estimate
crowding-in of private investment by public
investment for eight EMDEs with available datafor 1998Q1-2016Q2. A decomposition of
investment into private and public investment isonly available for a restricted sample of EMDEs.
The sample includes Bulgaria, Czech Republic,
Hungary, Mexico, Poland, Romania, Slovak
Republic, and Turkey. These countries are highly
open and rank above the EMDE average in the

233

234

CHAPTER 3

World Bank Doing Business indicators. Variables
included are, in this ordering: real government
investment, real GDP, real private investment,
current account balance, and the real effective
exchange rate. The results are statisticallysignificant within the usual 16-84 percent
confidence bands.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

ANNEX Table 3.2.1 Investment growth aroundgovernance reform spurts and setbacks

Dependent variable: investment growtht-3

E. Investment growth and reforms
t-2

Values in columns of Figure 3.19 are based on apanel data regression in which the dependent
variable is real investment growth. A spurt(setback) is defined as a two-year increase(decrease) by two standard deviations in one ormore of the following four measures of theWorldwide Governance Index (WGI): regulatory
quality, government effectiveness, rule of law, andcontrol of corruption. The WGI indicators are
principal components of a wide range of surveybased and other indicators. For each index, thestandard deviation is measured as the average ofthe standard errors of the WGI Index in the
beginning and at the end of each two-year
interval. Episodes in which there were
improvements in one measure and simultaneous
setbacks in another are excluded. The sample
spans 97 EMDEs over 1996‐2015, and excludes
EMDEs with populations less than 3 million.
Let t denote the end of a two-year spurt or
setback. The coefficients are dummy variables for
spurts and setbacks over the [t-3, t+2] window
around these episodes. In Figure 3.19, “Reform”
denotes the t=[-1,0] window (i.e., around the two
yearsofimprovement/deterioration).
Allcoefficients show the investment growthdifferential of economies during an episodecompared to those that experienced neither
improvements nor setbacks. All estimates include
time-fixed effects to control for global common
shocks and country-fixed effects to control fortime‐invariant heterogeneity at the country‐level.
Robust standard error estimates during the reformspurt window are jointly significant at the ten
percent level (Annex Table 3.2.1).

t-1

Period t of reform spurt

t+1

t+2

s-3

s-2

s-1

Period s of reform setback

s+1

s+2

-1.52
(2.74)-2.67(2.37)
0.84(2.69)
4.58**(2.01)
2.32(2.37)-0.46(2.96)-2.33(3.58)-1.05(2.18)-1.81(2.86)-2.17(2.56)-2.02(2.83)-0.78(2.97)

Observations

1,582

R-squared

0.127

Note: The regression includes time and country fixed effects. t indicates the period of
the significant reform spurt, s the period of the significant reform setback as defined in
Annex E. Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

References
Abiad, A., D. Furceri, and P. Topalova. 2015.
“The Macroeconomic Effects of Public
Investment:
Evidence
fromAdvanced
Economies.” Working Paper 15/95. International
Monetary Fund, Washington, DC.
Adhvaryu, A., N. Kala, and A. Nyshadham. 2016.
“The Light and the Heat: Productivity Cobenefits of Energy-Saving Technology.” Private
Enterprise
Developmentin
Low-Income
Countries (PEDL) Research Note 1775,
Department for International Development,
London.
Aghion, P., P. Howitt, and F. Murtin. 2011. “The
Relationship between Health and Growth: When
Lucas Meets Nelson-Phelps.” Review of Economics
and Institutions 2 (1): 1-24.
Ahuja, A., and M. Nabar. 2012a. “The Spillover
Effects of a Downturn in China’s Real Estate
Investment.”
WorkingPaper
12/266,
International Monetary Fund, Washington, DC.
Ahuja, A., and M. Nabar. 2012b. “InvestmentLed Growth in China: Global Spillovers.”
Working Paper 12/267, International Monetary
Fund, Washington, DC.

CHAPTER 3

Anand, R. and V. Tulin. 2014. “Disentangling
India’s Investment Slowdown.” Working Paper
14/47,
International
Monetary
Fund,
Washington, DC.
Andrews, D., C. Criscuolo, and P. N. Gal. 2015.
“Frontier Firms, Technology Diffusion and Public
Policy: Micro Evidence from OECD Countries.”
Productivity
WorkingPaper
2015-02,
Organisation for Economic Co-operation andDevelopment, Paris.
Arena, M., S. Bouza, E. Dabla-Norris, K. Gerling,and L. Njie. 2015. “Credit Booms andMacroeconomic Dynamics: Stylized Facts andLessons for Low-Income Countries.” Working
Paper 15/11, International Monetary Fund,
Washington, DC.
Aschauer, D. 1989. “Is Public Expenditure
Productive?” Journal of Monetary Economics 23 (2):177-200.
Azman-Saini, W., S. Law, and A. Ahmad. 2010.
“FDI and Economic Growth: New Evidence on
the Role of Financial Markets.” Economics Letters107(2): 211-213.
Azzimonti, M. 2016. “The Politics of FDI
Expropriation.” Working Paper 22705, National
Bureau of Economic Research, Cambridge, MA.

Albino-War, M., S. Cerovic, J. C. Flores, K.
Javier, H. Qu, Y. Said, and B. Shukurov. 2014.
“Making the Most of Public Investment in
MENA and CCA Oil-Exporting Countries.” IMF
Staff Discussion Note. International Monetary
Fund, Washington, DC.

Baffes, J., M. A. Kose, F. Ohnsorge, and M.
Stocker. 2015. “The Great Plunge in Oil Prices:
Causes, Consequences, and Policy Responses.”
Policy Research Note 1, World Bank, Washington
DC.

Alesina, A., and R. Perotti. 1996. “Income
Distribution,
Political
Instability,andInvestment.” European Economic Review 40 (6):1203-1228.

Bahal, G., M. Raissi, and V. Tulin. 2015.
“Crowding-Out or Crowding-In? Public andPrivate Investment in India.” Working Paper
15/264.
International
Monetary
Fund,
Washington, DC.

Alfaro, L., A. Chanda, S. Kalemli-Ozcan, and S.
Sayek. 2004. “FDI and Economic Growth: The
Role of Local Financial Markets.” Journal ofInternational Economics 64(1): 89–112.

Bailey, M., J. Manyika, and S. Gupta. 2013. U.S.
Productivity Growth: An Optimistic Perspective.
Washington, DC: Brookings Institution.

Alfaro, L. and E. Hammel. 2007. “Capital Flows
and Capital Goods.” Journal of International
Economics 72 (1): 128–150.

Baker, S., N. Bloom, and S. J. Davis. 2016.
“Measuring Economic Policy Uncertainty.”
Quarterly Journal of Economics 131(4): 1593-1636.

235

236

CHAPTER 3

Baker, S., N. Bloom, B. Canes-Wrone, S. J. Davis,
and J. Rodden. 2014. “Why Has U.S. Policy
Uncertainty Risen Since 1960?” American
Economic Review, Papers & Proceedings 104 (5): 56-60.
Banerjee, R., J. Kearns, and M. Lombardi. 2015.
“(Why) Is Investment Weak?” BIS Quarterly
Review, March. Bank for International
Settlements, Geneva.
Barkbu, B., S. P. Berkmen, P. Lukyantsau, S.
Saksonovs, and H. Schoelermann. 2015.
“Investment in the Euro Area: Why Has It Been
Weak?” Working Paper 15/32, International
Monetary Fund, Washington, DC.
Barro, R. J. 2013. “Health and Economic
Growth.” Annals of Economics and Finance 14 (2):329-366.
Barro, R., and J.-W. Lee. 2015. Education Matters
Global Schooling Gains from the 19th to the 21stCentury. Oxford: Oxford University Press.
Bengoa, M., and B. Sanchez-Robles. 2003.
“Foreign Direct Investment, Economic Freedom
and Growth: New Evidence from Latin America.”
European Journal of Political Economy 19: 529545.
Blanchard, O. J., and L. Katz. 1999. “Wage
Dynamics: Reconciling Theory and Evidence”.
NBER Working Paper 6924, National Bureau of
Economic Research, Boston.
Bloom, D., D. Canning, and J. Sevilla. 2004.
“The Effect of Health on Economic Growth: A
Production
Function
Approach.”World
Development 32 (1): 1–13.
Bloom, N. 2009. “The Impact of Uncertainty
Shocks.” Econometrica 77 (3): 623-685.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Bom, P. R. D., and J. E. Ligthart. 2014. “WhatHave We Learned From Three Decades of
Research on the Productivity of Public Capital?”
Journal of Economic Surveys 28 (5): 889–916.
Borensztein, E., J. D. Gregorio, and J.-W. Lee.
1998. ‘‘How Does Foreign Direct Investment
Affect Growth?’’ Journal of International Economics
45 (1): 115–135.
Borio, C., E. Karroubi, C. Upper, and F.
Zampolli. 2015. “Labour Reallocation and
Productivity Dynamics: Financial Causes, Real
Consequences.” BIS Working Papers 534. Bankfor International Settlements, Basel.
Bourreaua, M., C. Cambinib, and P. Doğanc.
2012. “Access Pricing, Competition, andIncentives to Migrate from ‘Old’ to ‘New’
Technology.” International Journal of Industrial
Organization 30 (6): 713-723.
Brynjolfsson, E., and A. McAfee. 2011. Race
Against the Machine: How the Digital Revolution is
Accelerating Innovation, Driving Productivity, andIrreversibly Transforming Employment and theEconomy. Lexington: Digital Frontier Press.
Buffie, E. F., A. Berg, C. Pattillo, R. Portillo, and
L-F. Zanna. 2012. “Public Investment, Growth,and Debt Sustainability: Putting Together the
Pieces.” Working Paper 12/144. International
Monetary Fund, Washington, DC.
Busse, M., and J. L. Groizard. 2008. “Foreign
Direct Investment, Regulations and Growth.” The
World Economy 31: 861–886.
Bussiere, M., L. Ferrara, and J. Milovich. 2016.
“Explaining the Recent Slump in Investment: The
Role of Expected Demand and Uncertainty.” IMF
Research Bulletin 17 (1): 1-3.

Bloom, N., S. Bond, and J. van Reenen. 2007.
“Uncertainty and Investment Dynamics” Review
of Economic Studies 74: 391-415.

Bussolo, M., J. Koettl, and E. Sinnott. 2015.
Golden Aging : Prospects for Healthy, Active, andProsperous Aging in Europe and Central Asia.
Washington, DC: World Bank.

Bloomfield, P. 2006. “The Challenging Businessof Long-Term Public–Private Partnerships:
Reflections on Local Experience.” Public
Administration Review 66 (3): 400-411.

Calcagnini, G., A. Ferrando, and G. Giombini.
2015. “Multiple Market Imperfections, Firm
Profitability and Investment.” European Journal of
Law and Economics 40 (1): 95-120.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Calderón, C., and L. Servén. 2014.
“Infrastructure, Growth, and Inequality: An
Overview.” Policy Research Working Paper 7034.
World Bank, Washington, DC.
Calderón, C., E. Moral-Benito, and L. Servén.
2015. “Is Infrastructure Capital Productive? A
Dynamic Heterogeneous Approach.” Journal ofApplied Econometrics 30 (2): 177–98.
Carrière-Swallow, Y., and L. F. Céspedes. 2013.
“The Impact of Uncertainty Shocks in Emerging
Economies.” Journal of International Economics 90(2): 316-325.
Caselli, F. 2005. “Chapter 9 Accounting for Cross-Country Income Differences.” Handbook of
Economic Growth, Vol 1(A): 679-741.
Caselli, F., P. Pagano, and F. Schivardi. 2003.
“Uncertainty and the Slowdown in Capital
Accumulation in Europe.” Applied Economics 35:
79-89.
Cavallo, E., and C. Daude. 2011. “Public
Investment in Developing Countries: A Blessing
or a Curse?” Journal of Comparative Economics 39(1): 65–81.
Cerra, V., A. Cuevas, C. Goes, I. Karpowicz, T.
Matheson, I. Samake, and S. Vtyurina. 2016.
“Highways
to
Heaven:Infrastructure
Determinants and Trends in Latin America andthe Caribbean.” Working Paper 16/185,
International Monetary Fund, Washington, DC.
Chinn, M. D. 2014. “Central Banking:
Perspectives from Emerging Economies.” La
Follette School of Public Affairs Working Paper
Series, No. 2014-006.
Citigroup. 2016. “Urbanization: A Major Driverof Infrastructure Spending.” Citigroup, NewYork.
Coflan, A. 2016. “China’s State Investment Surge:
Stimulus or Statistics?” Rhodium Group Research.
http://rhg.com/notes/chinas-state-investmentsurge-stimulus-or-statistics.
Colecchia, A., and P. Schreyer. 2002. “ICT
Investment and Economic Growth in the 1990s:
Is the United States a Unique Case? A

CHAPTER 3

Comparative Study of Nine OECD Countries.”
Review of Economics Dynamics 5 (2): 408-442.
Comin, D., and M. M. Ferrer. 2013. “IfTechnology Has Arrived Everywhere, Why Has
Income Diverged?” Working Paper 19010,
National Bureau of Economic Research,
Cambridge, MA.
Constantinescu, C., A. Mattoo, and M. Ruta.
2015. “The Global Trade Slowdown: Cyclical or
Structural?” Working Paper 15/6, International
Monetary Fund, Washington, DC.
Constantinescu, C., A. Mattoo, and M. Ruta.
2016. “Does the Global Trade Slowdown
Matter?” Policy Research Working Paper 7673,
World Bank, Washington, DC.
Corcoran, A., and R. Gillanders. 2015. “Foreign
Direct Investment and the Ease of Doing
Business.” Review of World Economics 151 (1): 103-26.
Cowen, T. 2011. The Great Stagnation: How
America Ate All the Low-Hanging Fruit of Modern
History, Got Sick, and Will (Eventually) Feel Better.
New York: Dutton.
Czernich, N., O. Falck, T. Kretschmer, and L.
Woessmann. 2011. “Broadband Infrastructureand Economic Growth.” The Economic Journal
121: 505–532.
Dabla-Norris, E., J. Brumby, A. Kyobe, Z. Mills,
and C. Papageorgiou. 2012. “Investing in Public
Investment: An Index of Public Investment
Efficiency.” Journal of Economic Growth 17 (3):
235–66.
Dasgupta, B., L. Somik, and N. Lozano-Gracia.
2014. “Urbanization and Housing Investment.”
World Bank Policy Research Paper 7110, World
Bank, Washington, DC.
Didier, T., M. A. Kose, F. Ohnsorge, and L. S.
Ye. 2015. “Slowdown in Emerging Markets:
Rough Patch or Prolonged Weakness?” Policy
Research Note 4, World Bank, Washington, DC.
Dreger, C., and H. Reimers. 2014. “On the
Relationship between Public and Private

237

238

CHAPTER 3

Investment in the Euro Area.” DIW Berlin
Discussion Papers 1365. Berlin, Germany.
ECB (European Central Bank). 2016. “Public
Investment in Europe.” ECB Economic Bulletin(2): 1–14. European Central Bank, Frankfurt.
Eden, M., and A. Kraay. 2014. “Crowding in andthe Returns to Government Investment in Low
Income Countries.” Development ResearchGroup Working Paper 6781. World Bank,
Washington, DC.
Elekdag, S., and Y. Wu. 2013. “Rapid Credit
Growth in Emerging Markets: Boon or BoomBust?” Emerging Markets Finance and Trade 49(5): 45-62.
Erden, L., and R. G. Holcombe. 2005. “The
Effects of Public Investment on Private
Investment in Developing Economies.” Public
Finance Review 33 (5): 575–602.
Ernst & Young. 2016. Worldwide Corporate Tax
Guide. London: Ernst & Young.
Estache, A., and G. Garsous. 2012. “The Impact
of Infrastructure on Growth in Developing
Countries.” IFC Economics Notes. 1. International
Finance Corporation, Washington, DC.
Everhart S., J. Martinez-Vazquez, and R. M.
McNab. 2009. “Corruption, Governance,
Investment and Growth in Emerging Markets.”
Applied Economics 41 (13): 1579-1594.
Feldstein, M. 2008. “Did Wages Reflect Growth
in Productivity?” NBER Working Paper 13953,
National Bureau of Economic Research,
Cambridge, MA.
Fernald, J. G. 1999. “Roads to Prosperity?
Assessing the Link between Public Capital and
Productivity.” American Economic Review 89 (3):619‐638.
Ferreira, F. H. G. 1995. “Wealth Distribution
Dynamics
with
Public-Private
CapitalComplimentarity.” Discussion Paper TE/95/286.
London School of Economics and Political
Science, London.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Field, E. 2005. “Property Rights and Investment
in Urban Slums.” Journal of the European
Economic Association 3 (2‐3): 279-290.
Fournier, J.-M., and A. Johansson. 2016. “The
Effect of the Size and the Mix of Public Spending
on Growth and Inequality.” Economics
Department Working Paper 1344. Organisation
for Economic Co-operation and Development,
Paris.
Freund, C. 2016. “The Global Trade Slowdown
and Secular Stagnation.” Peterson Institute ofInternational Economics blog. https://piie.com/
blogs/trade-investment-policy-watch/global-tradeslowdown-and-secular-stagnation.
G20. 2015. G20/OECD Report on G20 Investment
Strategies. Vol 2. Organisation for Economic Cooperation and Development, Paris.
______. 2016a. “Developments in Investment andPolicy Challenges.” Paper for G-20, June.
Organisation for Economic Co-operation andDevelopment, Paris.
2016b. G20 Leaders’ Communique,Hangzhou Summit, Sept 4-5.

______.

Getachew, Y. Y. 2010. “Public Capital andDistributional Dynamics in a Two-Sector Growth
Model.” Journal of Macroeconomics 32 (2): 606–
16.
Gilchrist, S., J. Sim, and E. Zakrajsek. 2014.
“Uncertainty, Financial Frictions, and Investment
Dynamics.” Working Paper 20038, National
Bureau of Economic Research, Cambridge, MA.
Glaeser, E. L. 2008. Cities, Agglomeration andSpatial Equilibrium. Oxford: Oxford University
Press.
Gollop, F. M., B. M. Fraumeni, and D. W.
Jorgenson. 1987. Productivity and U.S. Economic
Growth. Cambridge: Harvard University Press.
Gordon, R. J. 2012. “Is U.S. Economic Growth
Over? Faltering Innovation Confronts the Six
Headwinds.” Working Paper 18315. National
Bureau of Economic Research, Cambridge, MA.
Griliches, Z. 1988. “Productivity Puzzles and R &GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

CHAPTER 3

D: Another Nonexplanation.” Journal of Economic
Perspectives 2 (4): 9-21.

30.
International
Washington, DC.

Hall, R.E., and C. Jones. 1999. “Economic
Growth: A Review Essay.” The Quarterly Journalof Economics 114 (1): 83-116.

IMF (International Monetary Fund). 2015a.
“Private Investment: What’s the Holdup?”
Chapter 4, World Economic Outlook, April.
Washington, DC: International Monetary Fund.

Hall, R.E., and D.W. Jorgenson. 1967. “TaxPolicy and Investment Behavior.” American
Economic Review 57 (3): 391-414.
Hall, R.E. 2016. “Macroeconomics of Persistent
Slumps.” NBER Working Paper 22230. National
Bureau of Economic Research, Cambridge, MA.
Hennessy, C. 2004. “Tobin's Q, Debt Overhang,and Investment.” Journal of Finance 59 (4): 1717–
1742.
Herrera, S., and G. Pang. 2005. Efficiency of
Public Spending In Developing Countries: An
Efficiency Frontier Approach. Washington, DC:
World Bank.
Holtz-Eakin, D., and M. Mandel. 2015.
“Dynamic Scoring and Infrastructure Spending.”
McGraw Hill Financial Global Institute, NewYork.
Hong, G.H., J. Lee, W. Liao, and D. Seneviratne.
2016. “China and Asian Global Trade
Slowdown.” Working Paper 16/105, International
Monetary Fund, Washington, DC.
Hsieh, C.‐T. and P. Klenow. 2010. “Development
Accounting.” American Economic Journal:
Macroeconomics 2: 207-223.
Huidrom, R., M. A. Kose, and F. Ohnsorge.
Forthcoming. “Spillovers from Major Emerging
Markets.” Mimeo, World Bank, Washington,
DC.
IFC (International Finance Corporation). 2016a.
“Global Productivity Slowdown and the Role ofTechnology Adoption in Emerging Markets.”
Note 6, EMCompass. International FinanceCorporation, Washington, DC.
IFC (International Financial Corporation).
2016b. “A New Look at the Determinants ofInvestment in Emerging Markets.” Mimeo, Sept.

Finance

Corporation,______. 2015b. People’s Republic of China: Staff
Report for the 2015 Article IV Consultation.
Washington, DC: International Monetary Fund.
______. 2016. “Global Trade: What’s Behind the
Slowdown?” Chapter 2, World Economic Outlook,
October. Washington, DC: International
Monetary Fund.
Inderst, G. 2016 “Infrastructure Investment,
Private Finance, and Institutional Investors: Asia
from a Global Perspective.” ADBI Working Paper
555. Asian Development Bank, Manila.
International Energy Agency. 2014. World Energy
Investment Outlook – Special Report, Paris:
International Energy Agency.
Ismail, N. W., and J. M. Mahyideen. 2015. “TheImpact of Infrastructure on Trade and Economic
Growth in Selected Economies in Asia.” Working
Paper Series 553, Asian Development Bank
Institute, Manila.
Jones, C. 2003. “Human Capital, Ideas, andEconomic Growth.” In Finance, Research,
Education, and Growth, edited by L. Paganetto,and E. Phelps. London: Palgrave McMillian.
Jorgenson, D. 1963. “Capital Theory andInvestment Behavior.” American Economic Review
53 (2): 247-259.
______. 1991. “Productivity and Economic
Growth,” In Fifty Years of Economic Measurement:
The Jubilee of the Conference on Research in Income
and Wealth. National Bureau of Economic
Research, Cambridge, MA.
Jorgenson, D., and C. D. Siebert. 1968. “Optimal
Capital Accumulation and Corporate Investment
Behavior.” Journal of Political Economy 76 (6):1123-1151.

239

240

CHAPTER 3

Julio, B., and Y. Yook. 2012. “Political
Uncertainty and Corporate Investment Cycles.”Journal of Finance 67 (1): 45‐83.
Jurado, K., S. Ludvigson, and S. Ng. 2015.
“Measuring Uncertainty.” American Economic
Review 105 (3): 1177-1216.
Kalemli-Ozcan, S., L. Laeven, and D. Moreno.
2015. “Debt Overhang in Europe: Evidence from
Firm-Bank-Sovereign Linkages.” Unpublishedpaper, University of Maryland.
Kang, J.S., and W. Liao. 2016. “Chinese Imports:
What’s Behind the Slowdown?” Working Paper
16/106,
International
Monetary
Fund,
Washington, DC.
Keefer, P. and S. Knack. 2007. “Boondoggles,
Rent-Seeking, and Political Checks and Balances:
PublicInvestment
under
Unaccountable
Governments.” The Review of Economics andStatistics 89 (3): 566-572.
Kessides, I. 2004. “Reforming Infrastructure:
Privatization, Regulation, and Competition.”
PolicyResearch
Report,World
Bank,
Washington, DC.
Klenow, P., and A. Rodríguez-Clare. 1997.
“Economic Growth: A Review Essay.” Journal of
Monetary Economics 40: 597-618.
Kohpaiboon, A. 2003. “Foreign Trade Regimes
and the FDI-Growth Nexus: A Case Study ofThailand.” Journal of Development Studies 40 (2):55-69.
Kothari, S. P., J. Lewellen, and J. B. Warner.
2015. “The Behavior of Aggregate Corporate
Investment.” MIT Sloan Research Paper 5112-14,
MIT, Cambridge.
Kose, M. A., and M. Terrones. 2015. Collapse andRevival: Understanding Global Recessions andRecoveries. Washington, DC: International
Monetary Fund.
Kose, M. A., E. Prasad, K. Rogoff, and S. Wei.
2009. “Financial Globalization: A Reappraisal.”
IMF Staff Papers 56 (1): 8-62.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Kose, M. A., S. Kurlat, F. Ohnsorge, and N.
Sugawara. Forthcoming. “A Cross-Country
Database of Fiscal Space.” World Bank Policy
Research Working Paper. World Bank,
Washington, DC.
Kraay, A. 2014. “Government Spending
Multipliers in Developing Countries: Evidence
from Lending by Official Creditors.” American
Economic Journal: Macroeconomics 6 (4): 170–208.
Kuijs, L. 2016. “Credit and Investment –Problems and Misunderstandings.” Research
Briefing-China, Oxford Economics.
Lamont, O. 2002. “Macroeconomic Forecasts andMicroeconomic Forecasters.” Journal of Economic
Behavior & Organization 48(3): 265-280.
Lardy, N. R., and Z. Huang. 2016. “China
Private Investment Softens, But Not as Much as
Official Data Suggest.” Peterson Institute forInternational Economics, Washington, DC.
https://piie.com/blogs/china-economic-watch/china-private-investment-softens-not-muchofficial-data-suggest.
Leboeuf, M., and B. Fay. 2016. “What Is Behind
the Weakness in Global Investment?” Staff
Discussion Paper 5, Bank of Canada, Ottawa.
Lewis, C., N. Pain, J. Strasky, and F. Menkyna.
2014. “Investment Gaps after the Crisis.”Economics Department Working Paper 1168,
Organisation for Economic Co-operation andDevelopment, Paris.
Li, D., N. Magud, and F. Valencia. 2015.
“Corporate Investment in Emerging Markets:
Financing vs. Real Options Channel.” Working
Paper 15/285, International Monetary Fund,
Washington, DC.
Lim, J. 2014. “Institutional and Structural
Determinants of Investment Worldwide.” Journalof Macroeconomics 41 (C): 160-177.
Magud, N., and S. Sosa. 2015. “Investment in
Emerging Markets. We Are Not in Kansas
Anymore...Or Are We?” Working Paper 15/77,
International Monetary Fund, Washington DC.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Mandl, U., A. Dierx, and F. Ilzkovitz. 2008. “The
Effectiveness and Efficiency of Public Spending.”
European Economy Economic Papers 301.
European Commission, Brussels.
Mankiw, N. G. 2012. Macroeconomics. New York:Worth Publishers.
Mauro, P. 1995. “Corruption and Growth.” The
Quarterly Journal of Economics 110 (3): 681‐712.
McGowan, M. A., and D. Andrews. 2015.
“Labour Market Mismatch and Labour
Productivity: Evidence from PIAAC Data.”
Economics Department Working Paper 1209,
Organisation for Economic Co-operation andDevelopment, Paris.
McKinsey & Company. 2016. “Bridging Global
Infrastructure Gaps.” McKinsey & Company,
Brussels.
McQuade, P., and M. Schmitz. 2016. “The Great
Moderation in International Capital Flows: a
Global Phenomenon?” ECB Working Paper 1952,
European Central Bank, Frankfurt.
Melzer, Brian. Forthcoming. “Mortgage Debt
Overhang: Reduced Investment by Homeowners
at Risk of Default.” Journal of Finance.
Mendoza, E., and M. E. Terrones. 2012. “AnAnatomy of Credits Booms and their Demise.”
Journal Economia Chilena 15 (2): 04-32.
Mishra, P., P. Montiel, P. Pedroni, and A.
Spilimbergo. 2014. “Monetary Policy and Bank
Lending Rates in Low-income Countries:
Heterogeneous Panel Estimates.” Journal of
Development Economics 111: 117-131.
Mody, A., and A. P. Murshid. 2005. “Growing
Up with Capital Flows.” Journal of International
Economics 65 (1): 249-266.
Montenegro, C. E., and H. A. Patrinos. 2014.
“Comparable Estimates of Returns to Schooling
Around the World.” Policy Research Working
Paper 7020, World Bank, Washington, DC.
Morrissey, O., and M. Udomkerdmongkol. 2012.
“Governance, Private Investment and Foreign
Direct Investment in Developing Countries.”

CHAPTER 3

World Development 40 (3): 437-445.
Munemo, J. 2014. “Business Start-Up Regulations
and the Complementarity Between Foreign andDomestic Investment.” Review of World Economics
150 (4): 745-61.
Myers, S. 1977. “Determinants of Corporate
Borrowing.” Journal of Financial Economics 5: 147-175.
Mutreja, P., B. Ravikumar, and M. J. Sposi. 2014.
“Capital
Goods
Trade
and
Economic
Development.” Working Paper 2014-012B,
Federal Reserve Bank of St. Louis.
Nabar, N., and J. Joyce. 2009. “Sudden Stops,
Banking Crises, and Investment Collapses.”
Journal of Development Economies 90 (2): 163-189.
Naumov, A. 2016. “Global Investment – The
Role of Emerging Markets.” Bank Underground,Bank of England, September 23. https://bankunderground.co.uk/2016/09/23/globalinvestment-the-role-of-emerging-markets/.
Nordås, H. K., and R. Piermartini. 2004.
“Infrastructure and Trade.” WTO Staff Working
Paper
ERSD-2004-04,
World
Trade
Organization, Geneva.
Occhino, F. and A. Pescatori. 2010. “Debt
Overhang and Credit Risk in a Business Cycle
Model.” Working Paper 1003, Federal Reserve
Bank of Cleveland, Cleveland.
OECD (Organisation for Economic Co-operation
and Development). 2015a. “Lifting Investment
for Higher Sustainable Growth.” OECD Economic
Outlook, 1: 205-279.
______. 2015b. Mapping Channels to Mobilise
Institutional Investment in Sustainable Energy.
Green Finance and Investment Series. Paris:
Organisation for Economic Co-operation andDevelopment.
______. 2016a. Compendium of Productivity
Indicators 2016. Paris: Organisation for Economic
Co-operation and Development.
______. 2016b. “Global Growth Warning: Weak
Trade, Financial Distortions.” Interim Economic

241

242

CHAPTER 3

Outlook, September. Organisation for Economic
Co-operation and Development, Paris.
______. 2016c. “Using the Fiscal Levers to Escapethe Low-Growth Trap.” Chapter 2, OECD
Economic Outlook, Organisation for Economic Co-operation and Development, Paris.
Ohnsorge, F., and S. Yu. 2016. “Recent Credit
Surge in Historical Context.” Policy ResearchWorking Paper 7704, World Bank, Washington,
DC.
Ollivaud, P., Y. Guillemette, and D. Turner.
2016. “Links Between Weak Investment and the
Slowdown in Productivity and Potential Output
Growth Across the OECD.” Working Paper
1304. Organisation for Economic Co-operation
and Development, Paris.
Pang, G., and S. Herrera. 2005. “Efficiency of
Public Spending in Developing Countries: An
Efficiency Frontier Approach.” Policy ResearchWorking Paper 3645. World Bank, Washington,
DC.
Pereira, A. M. 2000. “Is All Public Capital
Created Equal?” Review of Economics and Statistics
82 (3): 513–18.
Pereira, A. M., and J. M. Andraz. 2013. “On the
Economic Effects of Public Infrastructure
Investment: A Survey of the International
Evidence.” College of William and Mary
Department of Economics Working Paper 108.
Williamsburg, VA.
Petri, P., and M. Plummer. 2016. “The Economic
Effects of the Trans-Pacific Partnership: New
Estimates.” Working Paper 16-2, Peterson
InstituteforInternational
Economics,
Washington, DC.
Pongsiri, N. 2002. “Regulation and Public‐Private
Partnerships.” International Journal of Public Sector
Management 15 (6): 487 – 495.
Presbitero, A. F. 2016. “Too Much and Too Fast?
Public Investment Scaling-up and Absorptive
Capacity.” Journal of Development Economics (120)
17–31.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Qu, H., and J. Wang. 2016. “China: Why is
Private Investment Still Slowing?” In Asian
Economics Quarterly Report 19-24. HSBC Global
Research, Hong Kong SAR, China.
Qureshi, Z., J. L. Diaz‐Sanchez, and A.
Varoudakis. 2015. “The Post‐Crisis Growth
Slowdown in Emerging Economies and the Roleof Structural Reforms.” Global Journal of Emerging
Market Economies 7 (2): 179-200.
Rajaram, A., T. M. Le, N. Biletska, and J.
Brumby. 2010. “A Diagnostic Framework forAssessing Public Investment Management.” Policy
Research Working Paper 5397, World Bank,
Washington, DC.
Reinikka, R., and J. Svensson. 2002. “Copingwith Poor Public Capital.” Journal of Development
Economics 69: 51-69.
Schivardi, F., and E. Viviano. 2011. “Entry
Barriers in Retail Trade.” The Economic
Journal 121 (551): 145-170.
Sokoloff, K. L. 1988. “Inventive Activity in Early
Industrial America: Evidence from Patent
Records, 1790–1846.” The Journal of Economic
History 48 (04): 813–850.
St. Aubyn, M., A. Pina, F. Garcia, and J. Pais.
2009. “Study on the Efficiency and Effectivenessof Public Spending on Tertiary Education.”
European Economy Economic Papers 390.
European Commission, Brussels.
Straub,S.
2011.
“InfrastructureandDevelopment: A Critical Appraisal of the MacroLevel Literature.” Journal of Development Studies
47 (5): 683–708.
Summers, L. H. 2014. “Reflections on the ‘New
Secular Stagnation Hypothesis’.” In Secular
Stagnation: Facts, Causes, and Cures, 27-40. Center
for Economic Policy Research. London: UK.
Teulings, C., and R. Baldwin, eds. 2014. Secular
Stagnation: Facts, Causes, and Cures. Center for
Economic Policy Research. London: UK.
UNCTAD (United Nations Conference on Tradeand Development). 2014. “Investment in SDGs:GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

an Action Plan.” World Investment Report. New
York: United Nations.
______. 2016. “Investor Nationality: Policy
Challenges.” World Investment Report. New York:
United Nations.

CHAPTER 3______. 2009. World Development Report 2009:
Reshaping Economic Geography. Washington DC:
World Bank.
______. 2015a. Commodities Markets Outlook.
World Bank, Washington, DC.

Wacziarg, R., and K. H. Welch, 2008. “Trade
Liberalization and Growth: New Evidence.” The
World Bank Economic Review 22 (2): 187-231.

______. 2015b. Having Fiscal Space and Using It.
Global Economic Prospects January 2015.
Washington, DC: World Bank.

Wagstaff, A., C. Bredenkamp, and L. Buisman.
2014. “Progress Toward the Health MDGs.”
Policy Research Working Paper 6894, World
Bank, Washington, DC.

______. 2015c. The Global Economy inTransition. Global Economic Prospects June 2015.
Washington, DC: World Bank.

Warner, M. A. 2014. “Public Investment as an
Engine of Growth.” Working Paper 14/148.
International Monetary Fund, Washington, DC.
Wei, M., S. Patadia, and D. Kammen. 2010.
“Putting Renewables and Energy Efficiency to
Work: How Many Jobs Can the Clean Energy
Industry Generate in the U.S.?” Energy Policy 38(2): 919-931
Weil, D. 2014. “Health and Economic Growth.”
Handbook of Economic Growth 2: 623–682.
Whited, T. 1992. “Debt, Liquidity Constraints,
and Corporate Investment: Evidence from Panel
Data.” Journal of Financial Economics 47 (4): 1425
-1460.
Wilson, J. S., C. Mann, and Y. Pau. 2002. “Trade
Facilitation: A Development Perspective in the
Asia Pacific Region.” Asia Pacific Economic
Cooperation, Singapore.
Winthrop, R., G. Bulloch, P. Bhatt, and A.
Wood. 2013. Investment in Global Education: aStrategic Imperative for Business. Washington, DC:
Brookings Institution.
World Bank. 2005. World Development Report
2005: Better Investment Climate for Everyone.
Washington, DC: World Bank.
______. 2007. World Development Report 2007:
Development and the Next Generation. Washington
DC: World Bank.

______. 2015d. Development Goals in an Era of
Demographic Change. Global Monitoring Report
2015/2016. Washington, DC: World Bank.
______. 2015e. Bangladesh—Public Expenditure
Review Update: An Update of Fiscal Trends Basedon the 2010 Public Expenditure Review.
Washington, DC: World Bank.
______. 2015f. Progress Towards Sustainable
Energy 2015. Global Tracking Framework Report.
Washington, DC: World Bank.
______. 2016a. Spillovers amid Weak Growth.
Global Economic Prospects January 2016.
Washington, DC: World Bank.
______. 2016b. Divergences and Risks: Global
Economic Prospects June 2016. Washington, DC:
World Bank.
______. 2016c. Ethiopia—Public Expenditure
Review. Washington, DC: World Bank.
______. 2016d. Mexico—Public Expenditure
Review. Washington, DC: World Bank.
______. 2016e. South Asia Economic Focus:
Investment Reality Check.
World Bank,
Washington, DC.
Xing, R., J. Sun, and J. Zheng. 2016. “Five
Debates about the Private Investment Slump.”
Morgan Stanley Research.
Zhang J., J. Zhang, and R. Lee. 2003. “Rising
Longevity, Education, Savings, and Growth.”
Journal of Development Economics 70: 83–101.

243

Statistical
Appendix

STATISTICAL APPENDIXGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

247

TABLE 1 Real GDP Growth
Annual estimates and forecastsa
2014

Quarterly growthb

2015

2016e

2017f

2018f 2019f

15Q2

15Q3

15Q4

16Q1

16Q2 16Q3e

World

2.7

2.7

2.3

2.7

2.9

2.9

2.8

2.6

2.5

2.2

2.4

Advanced Economies

1.9

2.1

1.6

1.8

1.8

1.7

2.3

2.1

1.9

1.5

1.7

1.6

United States

2.4

2.6

1.6

2.2

2.1

1.9

3.0

2.2

1.9

1.6

1.3

1.7

Euro Area

1.2

2.0

1.6

1.5

1.4

1.4

2.0

2.0

2.3

1.7

2.3

1.5

Japan

0.3

1.2

1.0

0.9

0.8

0.4

1.8

2.1

1.1

0.4

0.9

1.1

3.1

2.2

2.0

1.2

1.3

1.3

2.4

1.9

1.7

1.9

2.1

2.3

4.3

3.5

3.4

4.2

4.6

4.7

3.9

3.7

3.6

3.6

3.8

3.6

6.7

6.5

6.3

6.2

6.1

6.1

6.5

6.5

6.4

6.3

6.4

6.4

Cambodia

7.1

7.0

7.0

6.9

6.9

6.8

..

..

..

..

..

..

China

7.3

6.9

6.7

6.5

6.3

6.3

7.0

6.9

6.8

6.7

6.7

6.7

United Kingdom
Emerging Market and Developing
Economies
East Asia and the Pacific

2.3

Fiji

5.3

4.1

2.4

3.9

3.7

3.5

..

..

..

..

..

..

Indonesia

5.0

4.8

5.1

5.3

5.5

5.5

4.7

4.7

5.0

4.9

5.2

5.0

Lao, PDR

7.5

7.4

7.0

7.0

6.8

7.2

..

..

..

..

..

..

Malaysia

6.0

5.0

4.2

4.3

4.5

4.5

4.9

4.7

4.5

4.2

4.0

4.3

Mongolia

8.0

2.3

0.1

2.0

3.5

3.7

0.7

8.0

-2.2

3.0

-0.3

-6.3

Myanmar

8.0

7.3

6.5

6.9

7.2

7.3

..

..

..

..

..

..

Papua New Guinea

7.4

6.8

2.4

3.0

3.2

3.0

..

..

..

..

..

..

Philippines

6.2

5.9

6.8

6.9

7.0

6.7

5.9

6.2

6.5

6.8

7.0

7.1

Solomon Islands

2.0

3.3

3.0

3.3

3.0

3.0

..

..

..

..

..

..

Thailand

0.8

2.8

3.1

3.2

3.3

3.4

2.7

2.9

2.8

3.2

3.5

3.2

Timor-Leste

5.9

4.3

5.0

5.5

6.0

5.5

..

..

..

..

..

..

Vietnam

6.0

6.7

6.0

6.3

6.3

6.2

6.5

6.9

7.0

5.5

5.6

6.6

2.3

0.5

1.2

2.4

2.8

2.9

0.2

0.5

1.0

1.3

1.8

0.0

Europe and Central Asia
Albania

1.8

2.6

3.2

3.5

3.5

3.7

2.8

3.6

2.1

3.1

3.2

..

Armenia

3.6

3.0

2.4

2.7

3.0

3.2

..

..

..

..

..

..

Azerbaijan

2.0

1.1

-3.0

1.2

2.3

2.3

5.5

1.2

-6.5

-0.2

-1.0

..

Belarus

1.7

-3.9

-2.5

-0.5

1.3

1.4

-4.5

-4.4

-4.2

-3.7

-3.2

..

Bosnia and Herzegovina

1.1

3.0

2.8

3.2

3.7

3.9

..

..

..

..

..

..

Bulgaria

1.3

3.6

3.5

3.2

3.1

3.1

3.1

3.8

3.6

3.6

3.5

3.2

Croatia

-0.4

1.6

2.7

2.5

2.5

2.6

1.2

2.8

1.8

2.7

2.8

2.9

Georgia

4.6

2.8

3.4

5.2

5.3

5.0

2.5

2.9

3.0

2.7

2.9

2.3

Hungary

4.0

3.1

2.1

2.6

2.8

2.7

2.9

2.6

3.4

1.1

2.8

2.2

Kazakhstan

4.2

1.2

0.9

2.2

3.7

4.0

0.8

0.2

1.0

-0.3

-0.3

..

Kosovo

1.2

4.1

3.6

3.9

3.7

3.6

..

..

..

..

..

..

Kyrgyz Republic

4.0

3.5

2.2

3.0

3.7

4.9

..

..

..

..

..

..

Macedonia, FYR

3.6

3.8

2.0

3.3

3.7

4.0

3.7

2.1

6.4

2.6

3.1

2.4

Moldova

4.8

-0.5

2.2

2.8

3.3

3.7

..

..

..

..

..

..

Montenegro

1.8

3.4

3.2

3.6

3.0

3.0

..

..

..

..

..

..
2.0

Poland

3.3

3.9

2.5

3.1

3.3

3.4

3.3

3.5

4.6

2.7

3.1

Romania

3.1

3.7

4.7

3.7

3.4

3.2

3.4

3.6

3.8

4.3

6.0

4.4

Russia

0.7

-3.7

-0.6

1.5

1.7

1.8

-4.5

-3.7

-3.8

-1.2

-0.6

-0.4

Serbia

-1.8

0.8

2.5

2.8

3.5

3.5

1.2

2.3

1.1

3.8

1.9

2.6

Tajikistan

6.7

6.0

6.0

4.5

5.2

4.5

..

..

..

..

..

..

Turkey

5.2

6.1

2.5

3.0

3.5

3.7

7.1

5.9

7.4

4.5

4.5

-1.8

Turkmenistan

10.3

6.5

6.2

6.5

6.8

7.0

..

..

..

..

..

..

Ukraine

-6.6

-9.9

1.0

2.0

3.0

3.0

-14.7

-7.2

-1.4

0.1

1.4

2.0

Uzbekistan

8.1

8.0

7.3

7.4

7.4

7.4

..

..

..

..

..

..

248

STATISTICAL APPENDIXGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa

Latin America and the Caribbean
Argentina

Quarterly growthb

2014

2015

2016e

2017f

2018f 2019f

15Q2

15Q3

15Q4

16Q1

16Q2 16Q3e

0.9

-0.6

-1.4

1.2

2.3

2.6

-0.8

-1.7

-2.5

-2.4

-1.4

-1.1

-2.6

2.5

-2.3

2.7

3.2

3.2

3.8

3.5

2.3

0.4

-3.4

..
..

Belize

4.1

2.9

-1.0

1.5

2.0

2.5

..

..

..

..

..

Bolivia

5.5

4.8

3.7

3.5

3.4

3.4

5.1

3.6

5.9

4.9

3.2

..

Brazil

0.5

-3.8

-3.4

0.5

1.8

2.2

-3.0

-4.5

-5.8

-5.4

-3.6

-2.9

Chile

1.9

2.3

1.6

2.0

2.3

2.5

2.3

2.5

1.7

2.3

1.6

1.6
1.2

Colombia

4.4

3.1

1.7

2.5

3.0

3.3

3.0

3.2

3.4

2.3

1.9

Costa Rica

3.0

3.7

4.3

3.9

3.7

3.7

4.6

4.8

3.0

4.5

4.2

..

Dominica

3.7

-2.5

1.3

2.8

2.7

2.7

..

..

..

..

..

..

Dominican Republic

7.6

7.0

6.8

4.5

4.2

4.0

..

..

..

..

..

..

Ecuador

4.0

0.2

-2.3

-2.9

-0.6

1.0

0.2

-0.8

-2.0

-4.0

-2.2

..

El Salvador

1.4

2.5

2.2

1.9

2.0

2.0

2.3

2.7

2.6

2.4

2.5

..

Guatemala

4.2

4.1

2.9

3.2

3.4

3.4

3.5

4.0

4.1

2.9

3.4

..

Guyana

3.8

3.2

2.6

3.8

3.9

4.1

..

..

..

..

..

..

Haitic

2.8

1.2

1.2

-0.6

1.5

2.0

..

..

..

..

..

..
3.4

Honduras

3.1

3.6

3.7

3.5

3.4

3.2

2.8

3.5

4.2

3.9

4.4

Jamaica

0.7

1.0

1.6

2.0

2.3

2.5

..

..

..

..

..

..

Mexico

2.3

2.6

2.0

1.8

2.5

2.8

2.5

2.8

2.4

2.3

2.6

2.0

Nicaragua

4.6

4.9

4.5

4.0

3.9

3.8

3.1

5.5

6.5

4.2

5.5

..

Panama

6.1

5.8

5.4

5.4

5.5

5.5

..

..

..

..

..

..

Paraguay

4.7

3.1

3.8

3.6

3.3

3.3

2.6

2.4

1.1

1.5

6.2

5.0

Peru

2.4

3.3

4.0

4.2

3.8

3.6

3.2

3.3

4.7

4.5

3.7

4.4

St. Lucia

-0.7

1.3

1.0

1.8

2.2

2.5

..

..

..

..

..

..

St. Vincent and the Grenadines

0.2

0.6

2.0

2.2

2.4

2.4

..

..

..

..

..

..

Suriname

0.4

-2.7

-7.0

0.5

1.1

1.3

..

..

..

..

..

..

Trinidad and Tobago

0.8

-1.8

-2.8

2.3

3.6

3.2

..

..

..

..

..

..

Uruguay

3.2

1.0

0.7

1.6

2.5

3.7

-0.5

0.5

-0.1

0.1

1.5

2.0

Venezuela, RB

-3.9

-5.7

-11.6

-4.3

0.5

1.0

..

..

..

..

..

..

3.3

3.2

2.7

3.1

3.3

3.4

4.3

4.0

2.6

2.1

2.2

..

Algeria

3.8

3.9

3.6

2.9

2.6

2.8

..

..

..

..

..

..

Bahrain

4.4

2.9

2.0

1.8

2.1

2.4

3.6

2.3

2.8

4.5

2.5

..

Djibouti

6.0

6.5

6.5

7.0

7.0

7.0

..

..

..

..

..

..

Egypt, Arab Rep.c

2.9

4.4

4.3

4.0

4.7

5.4

3.3

5.1

4.0

3.6

4.5

..

Iran, Islamic Rep.

4.3

1.7

4.6

5.2

4.8

4.5

..

..

..

..

..

..

Iraq

0.1

2.9

10.2

1.1

0.7

1.1

..

..

..

..

..

..

Jordan

3.1

2.4

2.3

2.6

3.1

3.4

2.4

2.6

2.6

2.3

1.9

..

Kuwait

0.5

1.8

2.0

2.4

2.6

2.8

..

..

..

..

..

..

Lebanon

1.8

1.3

1.8

2.2

2.3

2.5

..

..

..

..

..

..

Morocco

2.6

4.5

1.5

4.0

3.5

3.6

..

..

..

..

..

..

Oman

2.5

5.7

2.5

2.9

3.4

3.6

..

..

..

..

..

..

Qatar

4.0

3.6

1.8

3.6

2.1

1.3

4.8

3.6

3.9

1.4

2.0

..

Saudi Arabia

3.6

3.5

1.0

1.6

2.5

2.6

4.9

4.0

1.8

1.5

1.4

..

Tunisia

2.3

0.8

2.0

3.0

3.7

4.0

1.2

0.4

0.4

1.0

1.4

..

United Arab Emirates

3.1

3.8

2.3

2.5

3.0

3.3

..

..

..

..

..

..

West Bank and Gaza

-0.2

3.5

3.3

3.5

3.5

3.6

..

..

..

..

..

..

Middle East and North Africa

249

STATISTICAL APPENDIXGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa

Quarterly growthb

2014

2015

2016e

2017f

2018f 2019f

15Q2

15Q3

15Q4

16Q1

16Q2

16Q3e

6.7

6.8

6.8

7.1

7.3

7.4

7.4

7.5

7.1

7.9

6.9

7.1

Afghanistan

1.3

0.8

1.2

1.8

3.0

3.6

..

..

..

..

..

..

Bangladeshc d

6.1

6.6

7.1

6.8

6.5

6.7

..

..

..

..

..

..

Bhutan

5.7

6.5

7.4

9.9

11.7

11.7

..

..

..

..

..

..

Indiac d

7.2

7.6

7.0

7.6

7.8

7.8

7.5

7.6

7.2

7.9

7.1

7.3

South Asia

Maldives

6.5

1.9

3.5

3.9

4.6

4.6

..

..

..

..

..

..

Nepalc d

6.0

2.7

0.6

5.0

4.8

4.7

..

..

..

..

..

..

Pakistan

4.0

4.0

4.7

5.2

5.5

5.8

..

..

..

..

..

..

Sri Lanka

4.9

4.8

4.8

5.0

5.1

5.1

7.0

5.6

2.5

5.2

2.7

4.1

cd

4.7

3.1

1.5

2.9

3.6

3.7

2.0

2.1

1.4

0.2

-0.4

0.1

Angola

5.4

3.0

0.4

1.2

0.9

0.9

..

..

..

..

..

..

Benin

6.5

5.0

4.6

5.2

5.3

5.3

..

..

..

..

..

..

Botswana

3.2

-0.3

3.1

4.0

4.3

4.3

1.6

-3.3

-1.9

2.7

1.6

..

Burkina Faso

4.0

4.0

5.2

5.5

6.0

6.0

..

..

..

..

..

..

Burundi

4.7

-3.9

-0.5

2.5

3.5

3.5

..

..

..

..

..

..

Cabo Verde

1.8

1.5

3.0

3.3

3.5

3.5

..

..

..

..

..

..

Sub-Saharan AfricacCameroon

5.9

5.8

5.6

5.7

6.1

6.1

..

..

..

..

..

..

Chad

6.9

1.8

-3.5

-0.3

4.7

6.3

..

..

..

..

..

..

Comoros

2.1

1.0

2.0

2.5

3.0

3.0

..

..

..

..

..

..

Congo, Dem. Rep.

9.5

6.9

2.7

4.7

5.0

5.0

..

..

..

..

..

..
..

Congo, Rep.

6.8

2.6

4.6

4.3

3.7

3.7

..

..

..

..

..

Côte d'Ivoire

8.5

8.4

7.8

8.0

8.1

8.1

..

..

..

..

..

..

Equatorial Guinea

-0.7

-8.3

-5.7

-5.7

-6.6

-6.6

..

..

..

..

..

..

Ethiopiac

10.3

9.6

8.4

8.9

8.6

8.6

..

..

..

..

..

..

Gabon

4.3

3.9

3.2

3.8

4.6

4.6

..

..

..

..

..

..

Gambia, The

0.9

4.7

0.5

0.8

2.6

2.6

..

..

..

..

..

..

Ghana

4.0

3.9

3.6

7.5

8.4

8.4

..

..

..

..

..

..

Guinea

1.1

0.1

5.2

4.6

4.6

4.6

..

..

..

..

..

..

Guinea-Bissau

2.5

4.9

4.9

5.1

5.1

5.1

..

..

..

..

..

..

Kenya

5.3

5.6

5.9

6.0

6.1

6.1

5.9

6.0

5.7

5.9

6.2

..

Lesotho

3.6

1.7

2.4

3.7

4.0

4.0

..

..

..

..

..

..

Liberia

0.7

0.0

2.5

5.8

5.3

5.3

..

..

..

..

..

..

Madagascar

3.3

3.1

4.1

4.5

4.8

4.8

..

..

..

..

..

..

Malawi

5.7

2.8

2.5

4.2

4.5

4.5

..

..

..

..

..

..

Mali

7.0

6.0

5.6

5.1

5.0

5.0

..

..

..

..

..

..

Mauritania

6.4

3.0

4.0

4.2

3.8

3.8

..

..

..

..

..

..

Mauritius

3.6

3.4

3.2

3.5

3.8

3.8

..

..

..

..

..

..

Mozambique

7.4

6.6

3.6

5.2

6.6

6.6

..

..

..

..

..

..

Namibia

6.4

5.3

1.6

5.0

5.4

5.4

..

..

..

..

..

..

Niger

6.9

3.5

5.0

5.3

6.0

6.0

..

..

..

..

..

..

Nigeria

6.3

2.7

-1.7

1.0

2.5

2.5

2.3

2.8

1.7

-0.4

-2.2

-2.3

Rwanda

7.0

6.9

6.0

6.0

7.0

7.0

..

..

..

..

..

..

250

STATISTICAL APPENDIXGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa
2014

Quarterly growthb

2015

2016e

2017f

2018f 2019f

15Q2

15Q3

15Q4

16Q1

16Q2 16Q3e

Sub-Saharan Africa (continued)
Senegal

4.3

6.5

6.6

6.8

7.0

7.0

..

..

..

..

..

..

Seychelles

3.2

4.3

3.8

3.5

3.5

3.5

..

..

..

..

..

..

Sierra Leone

4.6

-21.1

3.9

6.9

5.9

5.9

..

..

..

..

..

..

South Africa

1.6

1.3

0.4

1.1

1.8

1.8

1.2

0.8

0.5

-0.1

0.7

0.7

Sudan

3.1

4.2

3.5

3.7

3.7

3.7

..

..

..

..

..

..

Swaziland

2.7

1.7

-0.9

1.9

3.1

3.1

..

..

..

..

..

..

Tanzania

7.0

7.0

6.9

7.1

7.1

7.1

..

..

..

..

..

..

Togo

5.9

5.5

5.4

5.0

5.5

5.5

..

..

..

..

..

..

Ugandac

4.8

5.0

4.6

5.6

6.0

6.0

..

..

..

..

..

..

Zambia

5.0

2.8

2.9

4.0

4.2

4.2

..

..

..

..

..

..

Zimbabwe

3.8

1.1

0.4

3.8

3.4

3.4

..

..

..

..

..

..

Source: World Bank and Haver Analytics.
a. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
b. Year-over-year quarterly growth of not-seasonally-adjusted real GDP, except for the United States, Ecuador, and Tunisia,
where only seasonally-adjusted data are available. Year-over-year quarterly growth in the United Kingdom is calculated using seasonally-adjusted real GDP.
Regional averages are calculated based on data from following countries.
East Asia and the Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam.
Europe and Central Asia: Albania, Azerbaijan, Belarus, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, FYR Macedonia, Poland,
Romania, Russia, Serbia, Turkey, and Ukraine.
Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras,
Mexico, Nicaragua, Paraguay, Peru, and Uruguay .
Middle East and North Africa: Bahrain, Egypt, Jordan, Qatar, Saudi Arabia, and Tunisia.
South Asia: India and Sri Lanka.
Sub-Saharan Africa: Botswana, Kenya, Nigeria, and South Africa.
c. Annual GDP is on fiscal year basis, as per reporting practice in the country.
d. GDP data for Pakistan are based on factor cost. For Bangladesh, Nepal, and Pakistan, the column labeled 2017 refers to FY2016/17. For India, the column
labeled 2016 refers to FY2016/17.
For additional information, please see www.worldbank.org/gep.

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SELECTED TOPICS

251

Global Economic Prospects: Selected Topics, 2015-17
Growth and Business Cycles
Low-income countries: Recent developments and outlook

January 2017 Box 1.1

Regional perspectives: Recent developments and outlook

January 2017 Box 1.2

Investment developments and outlook: East Asia and PacificJanuary 2017, Box 2.1.1

Recent investment slowdown: Europe and Central Asia

January 2017 Box 2.2.1

Recent investment slowdown: Latin America and the Caribbean

January 2017 Box 2.3.1

Recent investment slowdown: Middle East and North Africa

January 2017 Box 2.4.1

Recent investment slowdown: South Asia

January 2017 Box 2.5.1

Recent investment slowdown: Sub-Saharan Africa

January 2017 Box 2.6.1

Weak investment in uncertain times: Causes, implications and policy responses

January 2017, Chapter 3

Implications of rising uncertainty for investment in EMDEs

January 2017, Box 3.2

Implications of the investment slowdown in China

January 2017, Box 3.3

Interactions between public and private investment

January 2017, Box 3.4

Low-income countries: Recent developments and outlook

June 2016 Box 1.1

Quantifying uncertainties in global growth forecasts

June 2016, SF 2

Regional perspectives: Recent developments and outlook

June, 2016, Box 1.2

Regional integration and spillovers: East Asia and PacificJanuary 2016, Box 2.1.1

Regional integration and spillovers: Europe and Central Asia

January 2016, Box 2.2.1

Regional integration and spillovers: Latin America and the Caribbean

January 2016, Box 2.3.1

Regional integration and spillovers: Middle East and North Africa

January 2016, Box 2.4.1

Regional integration and spillovers: South Asia

January 2016, Box 2.5.1

Regional integration and spillovers: Sub-Saharan Africa

January 2016, Box 2.6.1

Who catches a cold when emerging markets sneeze?

January 2016, Chapter 3

Sources of the growth slowdown in BRICS

January 2016, Box 3.1

Understanding cross-border growth spillovers

January 2016, Box 3.2

Within-region spillovers

January 2016, Box 3.3

Recent developments in emerging and developing country labor markets

June 2015, Box 1.3

Low-income countries: Graduation, recent developments, and prospects

January 2015, Chapter 1

What does weak growth mean for poverty in the future?

January 2015, Box 1.1

What does a slowdown in China mean for Latin America and the Caribbean?

January 2015, Box 2.2

How resilient is Sub-Saharan Africa?

January 2015, Box 2.4

Commodity Markets
From commodity discovery to production: Vulnerabilities and policies in LICs

January 2016, Chapter 1

After the commodities boom: What next for low-income countries?

June 2015, Chapter 1, SF

Low oil prices in perspective

June 2015, Box 1.2

Understanding the plunge in oil prices: Sources and implications

January 2015, Chapter 4

What do we know about the impact of oil prices on output and inflation? A brief survey

January 2015, Box 4.1

252

SELECTED TOPICSGLOBAL ECONOMIC PROSPECTS | JANUARY 2017

Global Economic Prospects: Selected Topics, 2015-17
Globalization of Trade and Financial Flows
The U.S. economy and the world

January 2017, Special Focus

Regulatory convergence in mega-regional trade agreements

January 2016, Box 4.1.1

Can remittances help promote consumption stability?

January 2016, Chapter 4

Potential macroeconomic implications of the Trans-Pacific Partnership Agreement

January 2016, Chapter 4

Regulatory convergence in mega-regional trade agreements

January 2016, Box 4.1.1

China’s integration in global supply chains: Review and implications

January 2015, Box 2.1

What lies behind the global trade slowdown?

January 2015, Chapter 4

Monetary and Exchange Rate Policies
Investment-less credit booms

January 2017, Box 3.1

Recent credit surge in historical context

June 2016, SF1

Peg and control? The links between exchange rate regimes and capital account policies

January 2016, Chapter 4

Negative interest rates in Europe: A glance at their causes and implications

June 2015, Box 1.1

Hoping for the best, preparing for the worst: Risks around U.S. rate liftoff and policy options

June 2015, SF1.1

Countercyclical monetary policy in emerging markets: Review and evidence

January 2015, Box 1.2

Fiscal Policy
Having fiscal space and using it: Fiscal challenges in developing economies

January 2015, Chapter 3

Revenue mobilization in South Asia: Policy challenges and recommendations

January 2015, Box 2.3

Fiscal policy in low-income countries

January 2015, Box 3.1

What affects the size of fiscal multipliers?

January 2015, Box 3.2

Chile’s fiscal rule—An example of success

January 2015, Box 3.3

Narrow fiscal space and the risk of a debt crisis

January 2015, Box 3.4

GLOBAL ECONOMIC PROSPECTS | JANUARY 2017

SELECTED TOPICS

Development Economics Prospects Group (DECPG):
Selected Other Publications on the Global Economy, 2015-17
Commodity Markets Outlook
OPEC in historical context: Commodity agreements and market fundamentals

October 2016, SF

Energy and food prices: Moving in tandem?

July 2016, SF

Resource development in an era of cheap commodities

April 2016, SF

Weak growth in emerging market economies: What does it imply for commodity markets?

January 2016, SF

Understanding El Niño: What does it mean for commodity markets?

October 2015, SF

How important are China and India in global commodity consumption

July 2015, SF

Anatomy of the last four oil price crashes

April 2015, SF

Putting the recent plunge in oil prices in perspective

January 2015, SF

High-Frequency Monitoring
Global Monthly
Global Weekly
Global Daily

253

ECO-AUDIT
Environmental Benefits Statement
The World Bank Group is committed to reducing its environmental
footprint. In support of this commitment, we leverage electronic
publishing options and print-on-demand technology, which islocated in regional hubs worldwide. Together, these initiatives enable
print runs to be lowered and shipping distances decreased, resulting
in reduced paper consumption, chemical use, greenhouse gas
emissions, and waste.
We follow the recommended standards for paper use set by the Green
Press Initiative. The majority of our books are printed on Forest
Stewardship Council (FSC)–certified paper, with nearly all containing
50–100 percent recycled content. The recycled fiber in our book paper
is either unbleached or bleached using totally chlorine-free (TCF),
processed chlorine–free (PCF), or enhanced elemental chlorine–free(EECF) processes.
More information about the Bank’s environmental philosophy can befound at http://www.worldbank.org/corporateresponsibility.

S

tagnant global trade, subdued investment, and heightened

policy uncertainty marked another difficult year for theworld economy. A moderate recovery is expected for 2017,with receding obstacles to activity in commodity-exporting
emerging market and developing economies. Weak investment
is weighing on medium-term prospects across many emerging
market and developing economies. Although fiscal stimulus
in major economies, if implemented, may boost global growth
above expectations, risks to growth forecasts remain tilted tothe downside. Important downside risks stem from heightened
policy uncertainty in major economies.
In addition to discussing global and regional economic
developments and prospects, this edition of Global

Economic Prospects includes a chapter on the causes,
consequences and policy implications of weak investment inemerging markets and developing economies, and a special
focus on the role of the U.S. economy in the world.

Global Economic Prospects is a World Bank Group Flagship
Report that examines global economic developments andprospects, with a special focus on emerging market anddeveloping countries, on a semiannual basis (in January andJune). The January edition includes in-depth analyses of
topical policy challenges faced by these economies, while theJune edition contains shorter analytical pieces.