In China, after a couple of years of stimulus-fueled growth, investment is expected to resume its structural deceleration when policy support is withdrawn.

The prospect for weak investment growth in EAP over the medium term raises concerns about the effects on EAP’s potential output growth—the growth rate that can be sustained at full employment and capacity utilization. The sustained weakening of investment growth during the 2010s, together with declining total factor productivity growth, has already contributed to a slowdown in labor productivity growth in EAP and, as a result, slower convergence toward advanced economy per capita income levels (Dieppe 2020). The adverse effect of the COVID-19 pandemic on investment in EAP could be prolonged and adding to it will be the fallout from the war in Ukraine and heightened geopolitical tensions.

Despite several decades of rapid investment growth, investment needs in the region remain significant. Given the importance of investment in generating growth of productivity and per capita income, it is important that impediments to productive investment, including those related to financing, be reduced. For many EAP countries, boosting well-targeted public investment can have particularly large benefits due to high multipliers (Izquierdo, Pessino, and Vuletin et al. 2018). At the same time, improving business climates and reducing policy uncertainty are essential to supporting private investment.

Several possibilities could improve the regional investment outlook. A productivityenhancing investment surge might be triggered by the recovery from the pandemic. A boost could materialize through renewed investment in digital technologies in sectors such as manufacturing, finance, and education, or through the onshoring of production of some essential products (Dieppe 2020). A pickup in investment also creates opportunities to shift infrastructure spending toward more resilient and environmentally sustainable options, in turn raising productivity and supporting progress toward the Sustainable Development Goals (Hallegatte and Hammer 2020).

# 5.2 Evolution of regional investment

Investment growth in EAP declined from 11.6 percent a year on average in 2000-08 to 6.4 percent a year in 2011-21. But it has remained higher than average investment growth in all EMDEs (figure 4). The investment slowdown was particularly pronounced in China, where it dropped from a peak of 24.1 percent in 2009 to below 5 percent in 2019. This slowdown was policy-led and aimed at reducing reliance on credit-fueled investment for GDP growth and at managing financial stability risks. It was achieved largely through tighter macroprudential regulations and stricter oversight of shadow banking.

In the region excluding China, the moderation of investment growth initially reflected the worsening of terms of trade in large commodity-exporting economies like Indonesia and Malaysia during 2014-16 (Vashakmadze et al. 2018, World Bank 2017). In this period, virtually all EAP economies recorded investment growth below long-term averages, mainly reflecting weak private investment. Tight monetary, fiscal, and prudential policies designed to contain rapid credit growth also limited investment growth in these countries.