# **1. Introduction**<sup>**1**</sup>

Investment growth in emerging market and developing economies (EMDEs) has slowed sharply since 2010, declining from 10.2 percent, on average, in 2010 to 3.4 percent in 2015.<sup>2</sup> 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 the world’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 and protracted among these economies.

Recent investment weakness in EMDEs has followed the significant slowdown in investment growth in advanced economies (AEs) in the immediate 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 the subsequent 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 this expansion 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, and health systems are struggling to keep pace with rapid urbanization, economic activity, and changing demands on workforces. Commodity‐exporting 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 labor productivity, a key driver of the long‐term growth of real wages and household incomes, not only by capital‐deepening—equipping workers with more capital—but often also by embodying productivity‐ enhancing technological advances. While feeble investment in AEs has featured prominently in recent policy and academic debates, slowing investment growth in EMDEs has received less attention.<sup>3</sup> Yet, EMDEs constituted about 45 percent of world investment and two‐thirds of world investment growth during 2010‐2015 (Figure 1).

This paper examines the recent weakness in EMDE investment, its underlying drivers, and possible policy responses to revive investment growth. In particular, it addresses the following questions. First, what are the main features of the investment slowdown? Second, what is the macroeconomic backdrop to slowing

> 1 This paper draws from a background study featured in World Bank (2017). Figures and background data presented here are available at www.worldbank.org/gep.

> 2 Throughout this paper, unless otherwise specified, investment refers to real gross fixed capital formation (public and private combined). For the sake of brevity, “investment” is understood to indicate investment levels. Investment growth is measured as the annual percent change in real investment. The long‐term average refers to the average of available data for 1990‐2008, the pre‐crisis average to the average during 2003‐08.

> 3 Post‐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).

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