growth towards other, less trade‐intensive sources of growth. As a result, China’s investment growth has slowed gradually from record‐high levels in the wake of the crisis (Appendix 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 global primary energy demand from 2010‐14 (World Bank 2016a; Huidrom, Kose, and Ohnsorge forthcoming). As a result, China’s output and investment slowdown has weighed on growth in other EMDEs.

To estimate the magnitude of the impact of China’s output and investment slowdown on EMDE activity, a Bayesian vector autoregression is estimated 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 commodity‐importing EMDEs and 1 percentage point slower output growth in commodity‐ exporting EMDEs within a year. Since much of China’s investment is resource‐intensive, China’s rebalancing away from investment has had an additional adverse impact on commodity‐exporting EMDEs.

# **5. Implications of weak investment for global trade, long‐term growth and catch‐up**

The post‐crisis investment growth slowdown from record‐high pre‐crisis rates has lasting implications for global trade and long‐term growth prospects. In many countries, investment is more import‐intensive than other components of output. A slowdown in investment growth, therefore, weighs heavily on global trade growth. Moreover, by slowing the rate of capital accumulation and technological progress embedded in investment, a prolonged period of weak investment growth can set back potential output growth in EMDEs for years to come, with adverse implications for their ability to catch up with AE income levels.

**Slower global trade.** Since investment tends to be more import‐intensive than other components of demand, 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 (typically machinery and equipment), which accounted for about 14 percent of EMDE imports during 2015 (Figure 13). Capital goods imports tend to embody efficiency‐enhancing technology transfers across borders (Alfaro and Hammel 2007). Hence, their slowdown may also be reflected in slowing EMDE productivity growth. Post‐crisis global investment weakness was accompanied by a pullback in productive investment of multinational companies, which account for one‐third of global trade. Capital expenditures (excluding mergers and acquisitions) by the 5,000 largest multinationals shrank in both 2014 and 2015 (UNCTAD 2016).

The global trade slowdown is not only a symptom, but also a transmission mechanism that propagates the 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, and Sposi 2014).

**Slower capital accumulation.** Among OECD countries, the post‐crisis slowdown in potential growth to a large extent reflects the slowing pace of capital deepening (Ollivaud, Guillemette, and Turner 2016; Hall 2016). Similarly, slowing capital accumulation weighs on potential growth in EMDEs. If investment growth is assumed to remain as low as in 2015 (3.3 percent), 2020 potential growth would be about two‐thirds of potential growth in the pre‐crisis investment growth scenario.

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