Capital Slowdown

AuthorM. Ayhan Kose, Franziska Ohnsorge, and Lei Sandy Ye

Capital Slowdown Finance & Development, June 2017, Vol. 54, No. 2

M. Ayhan Kose, Franziska Ohnsorge, and Lei Sandy Ye

Investment growth in emerging market and developing economies has been sluggish since 2010

Investment growth in emerging market and developing economies has slowed sharply since the global financial crisis, declining from 10 percent a year in 2010 to less than 3.5 percent in 2016. While there have been signs of revival recently, over the past three years, investment growth, both public and private, has been not only well below its double-digit precrisis average rate but also below its long-term average.

Moreover, the investment weakness has been broad-based. In 2016, investment growth was below its long-term average in more than 60 percent of emerging market and developing economies, the largest number of countries to experience such sluggishness over the past quarter-century except during the 2009 global recession (see Chart 1). The weakness has persisted despite large unmet investment needs and is visible in both private and public components of investment.

The slowdown has been most pronounced among the large, so-called BRICS (Brazil, Russia, India, China, South Africa) economies and in commodity exporters. Between 2010 and 2016, investment growth dropped from about 13 percent to about 4 percent in the BRICS and from roughly 7 percent to 0.1 percent in non-BRICS commodity-exporting emerging market and developing economies. China accounted for about one-third of the total investment growth slowdown in these economies during this period and Brazil and Russia for another third. The sustained investment growth slowdown in emerging market and developing economies contrasts with its partial recovery in advanced economies since the global financial crisis. Investment growth in advanced economies averaged 2.1 percent during 2010–15. By 2014, it had returned to its long-term average growth rate, not far below where it was before the crisis.

Why the slowdown?The investment slowdown reflects a number of factors that offset exceptionally benign financing conditions—including record-low borrowing costs, ample financial market liquidity, and in some countries a surge in domestic private credit to the nonfinancial private sector. However, many headwinds offset the benefits of these historically low financing costs until late 2016, including disappointing economic activity and weak growth prospects and a severe decline in export prices vis-à-vis import prices (that is, a worsening in terms of trade) for commodity exporters, slowing and volatile capital flows, rapid...

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