# **EXECUTIVE SUMMARY**

**Slowing investment growth.** Investment growth in emerging market and developing economies (EMDEs) has slowed sharply since 2010, declining from 10 percent, on average, in 2010 to 3.4 percent in 2015. Investment growth was not only well below its pre‐crisis average, but was also below its long‐term average in nearly 70 percent of EMDEs in 2015. Surveys of long‐term forecasts suggest that investment weakness is expected to persist (Figure A1).

**Factors associated with the slowdown.** In commodity importers, slowing FDI inflows and spillovers from soft activity in major economies appeared to account for much of the slowdown in investment growth. In commodity exporters, a sharp terms of trade deterioration (for energy exporters) and mounting private debt burdens were the main factors associated with the slowdown in investment growth. Political and policy uncertainty has further contributed to lower investment growth in several EMDEs.

**Spillovers.** Over the past five years, advanced economy growth has repeatedly fallen short of expectations, partly because of crisis legacies. Sub‐par growth and growth prospects in advanced‐economy trading partners and source countries for FDI into EMDEs have slowed EMDE output growth. For every 1 percentage point lower output growth in the United States or Euro Area, EMDE output growth fell 0.8‐1.3 percentage points within a year. EMDE investment growth responded about twice as strongly as EMDE output to declines in U.S. and Euro Area growth. Sluggish economic activity in major advanced economies has coincided with a policy‐driven slowdown in investment growth in China. This has contributed to weakening global commodity prices and has weighed on growth in other EMDEs through inter‐sectoral input‐output links and, indirectly, via output growth spillovers.

**“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 near record lows. Private credit growth in about 30 EMDEs was near or above levels associated with credit booms at some point during 2010‐15. Historically, around 40 percent of credit booms have coincided with investment surges. However, similar credit booms since 2010 have taken place with virtually no such investment surges but, instead, often with rapidly rising consumption.

**Long‐term implications of weak investment growth.** By slowing capital accumulation and technological progress embedded in investment, weak post‐crisis investment growth has contributed to lower potential output growth from pre‐crisis rates. The slowdown in potential growth could be intensified if weakness in investment also sets back total factor productivity growth through a slowdown 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, and by undertaking measures to improve overall growth prospects and the business climate. Doing so directly through expanding public investment in infrastructure and human capital 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. More effective use of counter‐cyclical fiscal and monetary 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 a persistent terms of trade shock or if there is limited fiscal space. In any event, to raise investment growth sustainably, 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.

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