Nearly all the forces that have powered growth and prosperity since the early 1990s have weakened. The growth rates of investment and total factor productivity are declining.
The global labor force is aging, and expanding more slowly. International trade growth is much weaker now than it was in the early 2000s. In addition, a series of shocks has roiled the global economy over the past three years.
A persistent and broad-based decline in long-term growth prospects imperils the ability of emerging market and developing economies to combat poverty, tackle climate change, and meet other key development objectives. These challenges call for an ambitious policy response at the national and global levels.
The slowdown can be reversed by the end of the 2020s—if all countries replicate some of their best policy efforts of recent decades, including a major investment push grounded in robust macroeconomic frameworks. Bold policy actions at the national level will need to be supported by increased cross-border cooperation and substantial financing from the global community.
According to the World Bank's «Falling Long-Term Growth Prospects, Trends, Expectations and Policies» as the COVID-19 pandemic began in 2020, emerging market and developing economies (EMDEs) had experienced a slowdown in real investment growth spanning much of the previous decade.
From nearly 11 percent in 2010 to 3.4 percent in 2019. In EMDEs excluding China, investment growth tumbled more sharply: from 9 percent in 2010 to a mere 0.9 percent in 2019. The slowdown during the 2010s occurred in all EMDE regions, in both commodity-importing and commodity-exporting economies, and in a large share of individual economies. In advanced economies, by contrast, investment growth was more sluggish but also more stable, hovering around its long-term average of 2 percent per year.
Investment growth in advanced economies outpaced GDP growth during the 2000s and 2010s slightly, except for brief periods after the 2001 slowdown and 2009 recession. In contrast, in EMDEs, investment growth outpaced GDP growth by several percentage points in the 2000s but fell below output growth after 2013.
The pandemic triggered a severe investment contraction in EMDEs excluding China in 2020—a far deeper decline than in the 2009 global recession triggered by the global financial crisis. EMDEs including China did not avoid an investment contraction in 2020, as they had in 2009.
In advanced economies, however, investment shrank in 2020 by less than it had in 2009, buttressed by very large fiscal support packages and steep monetary loosening. After a sharp rebound in 2021, investment growth in EMDEs is projected to revert to a pace still below the average during the previous two decades. The medium-term investment growth outlook remains subdued, and has been downgraded substantially, along with the GDP growth outlook.
This is
due to the effects of the Russian Federation’s invasion of Ukraine on commodity markets
and supply chains, as well as historically high debt-to-GDP ratios and the sharp
tightening of financing conditions as monetary policy responds to rising inflation.
Some of the findings in the World Bank's publication are being summarised as follows,
First, compared to the years following the global financial crisis, the investment recovery following the COVID-19 pandemic is proceeding more slowly. The slow recovery partly reflects the widespread impact of the pandemic on investment: investment contracted in nearly threequarters of EMDEs during the pandemic. The effects of the pandemic and the war in Ukraine are expected to extend the prolonged and broad-based slowdown in investment growth in EMDEs during the 2010s. The slowdown occurred in all regions, in commodity-exporting and commodity-importing economies, and in private and public investment growth.
Second, empirical analysis in the chapter finds that investment growth in EMDEs over the past two decades is positively associated with output growth and, to a lesser degree, real credit growth and capital-flow-to-GDP ratios. Terms of trade improvements (for energy-exporting EMDEs) and investment climate reform spurts are associated with strengthening real investment growth. In contrast, in advanced economies, the most important correlate of investment growth is output growth, and other factors co-vary less strongly with investment growth than in EMDEs.
Third, investment growth in EMDEs in 2022 remained about 5 percentage points below the 2000-21 average, and by nearly 0.5 percentage points in EMDEs excluding China. For all EMDEs, projected investment growth through 2024 will be insufficient to return investment to the level suggested by the pre-pandemic (2010-19) investment trend. This investment weakness dampens long-term output growth and productivity, is associated with weak global trade growth, and makes meeting development and climate goals more challenging.
Fourth, a sustained improvement in investment growth in EMDEs requires the use of
policy tools and international financial support, with appropriate prescriptions
dependent on country circumstances. Macroeconomic policy can support investment in
EMDEs in a variety of ways, including through preserving macroeconomic stability.
Even with constrained fiscal space, spending on public investment can be boosted by
reallocating expenditures, freeing resources by moving away from distorting subsidies,
improving the effectiveness of public investment, strengthening revenue collection, and
engaging the private sector to co-finance infrastructure and other investment projects.
Structural policies also play a key role in creating conditions conducive to attracting
investment. Institutional reforms could address a range of impediments and
inefficiencies, such as high business startup costs, weak property rights, inefficient labor
and product market policies, weak corporate governance, costly trade regulation, and
shallow financial sectors. Setting appropriate, predictable rules governing investment,
including for public-private partnerships (PPPs), is also important.
Fifth, a review of the literature since 1990 finds mixed evidence on the relationship between FDI and output growth but a mostly positive relationship between FDI and domestic investment. That said, several country characteristics, time period specifics, and features of FDI have influenced the relationship between FDI, output growth, and investment. Greenfield investment in upstream and export-intensive, non-primary sectors has tended to be more conducive to growth and investment. FDI also tended to raise growth and investment more in countries with better institutions, more skilled labor forces, greater financial development, and trade openness.
(source: The World Bank)
