**Weaker productivity growth.** In addition to slowing capital accumulation, weak investment growth is associated with slower total factor productivity growth, as investment is often critical to the adoption of new, productivity‐enhancing technologies.<sup>7</sup> Among AEs, a steady productivity growth slowdown was underway even before the global financial crisis. Possible drivers include structural change towards lower‐ productivity services, caused partly by demand shifts related to population ageing, a lack of transformative innovations, and slower technology diffusion.<sup>8</sup> Weaker investment growth may partly account for the slowdown in total factor productivity growth in EMDEs, from 2.2 percent in 2010 to ‐0.2 percent in 2015.<sup>9</sup> The productivity slowdown was most pronounced in commodity‐exporting EMDEs and those EMDEs with the slowest investment growth (Figure 14). Weaker total factor productivity growth would also be reflected in slower labor productivity growth—the key driver of long‐term real wage growth and household income growth (Blanchard and Katz 1999; Feldstein 2008).

**Slower income catch‐up.** Weak investment growth in EMDEs is both a symptom and a source of slowing pace of catch‐up to AE income levels. Specifically, by reducing potential growth in EMDEs relative to AEs, it slows the pace of catch‐up in per‐capita incomes. In 2015, the difference in investment growth between EMDEs and AEs reached its lowest level since the early 2000s. If weakness in investment growth persists in EMDEs, per capita income catch‐up to U.S. levels would require several generations.<sup>10</sup> Since growth remains one of the most powerful drivers of poverty reduction, any setbacks to growth also imperil the achievement of global goals for poverty reduction (World Bank 2015d).

# **6. Policies to promote investment growth**

The analysis in this paper suggests that both external and domestic factors are holding back investment in EMDEs. External factors include weak FDI inflows, low commodity prices, and bouts 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 these drivers of investment growth are expected to turn more benign, but only very gradually. Investment growth is therefore expected to remain weak.

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 of growth. Finally, a boost to private investment, especially, would help revive slowing productivity growth. The specific investment priorities differ across countries and regions. Robust policy action—even in countries with limited room to mobilize domestic resources—is needed to accelerate investment growth prospects.

> 7 Gollop, Fraumeni, and Jorgenson (1987); Griliches (1988); Jorgenson (1991); Colecchia and Schreyer (2002); Bourreau, Cambini, and Dogan (2012); and OECD (2016a).

> 8 Brynjolfsson and McAfee (2011); Cowen (2011); Gordon (2012); Bailey, Manyika, and Gupta (2013); McGowan and Andrews (2015); Andrews, Criscuolo, and Gal (2015); and OECD (2016a).

> 9 TFP is calculated as residual from the growth‐accounting framework in Didier et al. (2015). The slowdown happened despite some evidence of somewhat faster cross‐country technology absorption from countries at the productivity frontier (Comin and Ferrer 2013; IFC 2016a).

> 10 To the extent that weak investment growth is associated with weak TFP growth, slowing income catch‐up can be further compounded, as TFP differences are a major source of differences in cross‐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 in supporting a higher capital level per person (Bussolo, Koettl, and Sinnott 2015).

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