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By Dr. Indermit Gill, Chief Economist and Senior Vice President for Development Economics, World Bank Group, and M. Ayhan Kose, Deputy Chief Economist, World Bank Group and Director of the Prospects Group
Among policymakers these days, one question rises above all others: What will it take to reignite investment and create jobs? Governments know that without stronger investment, growth will falter and opportunities will dry up. Investment finances the roads that connect farmers to markets, the power grids that light up factories, the digital networks that enable innovation and the classrooms that prepare the next generation. Investment is the foundation of job creation, the basis of lasting prosperity.
Today, across emerging-market and developing economies (EMDEs), serious cracks are appearing in that foundation. Investment growth has slowed sharply since the Great Financial Crisis (GFC) of 2008-09. Low investment is undermining development progress and limiting the ability of young workers to gain the skills and tools needed for success. At precisely this moment, when these economies need to build more, invest more and employ more, their investment engines are sputtering.
Today, across emerging-market and developing economies, serious cracks are appearing in that foundation. Investment growth has slowed sharply since the Great Financial Crisis (GFC) of 2008-09.
The effects are rippling across the world. EMDEs account for more than 40 percent of global gross domestic product (GDP) today, a share that is expected to rise over the next 25 years. Weak capital formation in these economies undermines global productivity, depresses demand for goods and services from advanced economies and slows progress on broader development challenges—from the energy transition to the digital transformation. Chronic underinvestment in these economies could undermine prosperity and stability far beyond their borders. Advanced economies today are aging and fiscally constrained. Their own growth increasingly depends on dynamic partners in the developing world.
Investment growth has slowed across the board
During the early 2000s, investment in EMDEs expanded at an average annual rate of about 10 percent. It was a golden era, when strong trade integration, ambitious domestic reforms and broadly supportive international conditions enabled these economies to slash poverty rates and begin to close their income gaps with wealthier economies. That pace has since dropped by half, to around 5 percent per year. The slump has been broad-based—across every EMDE region and across both public and private investment (see Figure 1).
Foreign direct investment (FDI)—historically a key source of capital, technology and managerial know-how—has also eroded steadily. At its peak in 2008, FDI inflows to EMDEs amounted to about 5 percent of GDP. Today, that ratio is barely above 2 percent.
The consequences are clear. The convergence process—in which developing economies narrow the investment gap with advanced economies—has stalled. Investment per worker in EMDEs rose rapidly in the 2000s, from approximately 8 percent of advanced-economy levels to about 15 percent, but the number has barely budged in the last 15 years in EMDEs outside of China (Figure 2). Sustained surges in investment, moreover, have become increasingly rare. Such surges matter: The record shows that when investment accelerates for several consecutive years, economic growth speeds up, productivity increases, job creation spikes and poverty falls. In the 2000s, nearly half of EMDEs experienced such accelerations. Since 2010, only about one-quarter have.
Why has investment been slowing?
Blame a confluence of cyclical and structural weaknesses:
- Macroeconomic fragility. Recurrent crises—financial, commodity, health and climate-related—have left many developing economies heavily indebted. On average, public-debt-to-GDP ratios in EMDEs (excluding China) are now about 20 percentage points higher than in 2010. Debt-service burdens absorb about one-tenth of government revenues. As fiscal space shrinks, public investment is often the first casualty.
- Loss of reform momentum and weak institutions. After undertaking wide-ranging reforms in the 2000s, EMDEs have lost momentum in strengthening their institutions. Business surveys consistently cite uncertain regulations, corruption and contract-enforcement problems as the top deterrents to private investment in EMDEs. Where the rules of the game are unclear or change unpredictably, investors stay away.
- Global fragmentation. Rising trade barriers, reshoring trends, unprecedented policy uncertainties and geopolitical tensions have disrupted supply chains and discouraged cross-border investment. Global trade growth has fallen by about a third since the 2010s. The number of new trade and investment agreements has also declined sharply(Figure 3).
- Overlapping shocks. The pandemic, the Russian invasion of Ukraine and the surge in inflation and associated interest-rate hikes have redirected scarce resources from long-term projects toward immediate relief, widening the gap between needs and investment capacity.
The employment challenge
By 2035, 1.2 billion young people aged 15–24 will live in EMDEs. Many of them will enter the labor market in regions already facing high unemployment and underemployment. Among the EMDE regions, Sub-Saharan Africa, the Middle East and North Africa (MENA) and South Asia will see the largest increases in working-age populations—even as public finances are stretched and private investment remains weak. Unless investment rebounds, millions of young people will struggle to find productive jobs. The result could be rising poverty, growing social unrest and mounting pressures for migration.
Closing the gap: A policy agenda for renewal
Investment is the primary engine of job creation, the surest way to reap the demographic dividend inherent in most developing economies. The link is straightforward: Without investment, economies cannot absorb new workers, adopt new technologies or transition from informal to formal employment. In short, there can be no sustainable jobs strategy without an investment strategy.
Reigniting investment will demand bold, coordinated action—reforms that restore confidence, draw in private capital and ensure that every dollar spent delivers real returns. The risks of further slowdowns are mounting as trade tensions flare, debt burdens grow and policy uncertainty clouds the horizon.
To achieve better investment outcomes, policy measures must be undertaken at both the domestic and global levels.
Yet history offers a hopeful lesson: When fiscal discipline and structural reforms move in tandem, they reinforce one another—turning fragile recoveries into full-fledged investment accelerations. To achieve better investment outcomes, policy measures must be undertaken at both the domestic and global levels.
National priorities. The first task is to strengthen the domestic foundations for investment.
- Rebuild macro-fiscal credibility. Clear fiscal frameworks, credible debt-management strategies and improved revenue mobilization can restore investor confidence and free resources for capital spending. Redirecting just one percentage point of GDP away from inefficient outlays and toward productive investment can raise long-term growth potential significantly.
- Improve the business climate and strengthen the efficiency of public investment. When investors have confidence that the rules are stable, they expand operations and hire more workers. Predictable regulations, clear land and tax laws, good governance and transparency reduce uncertainty and encourage private investment. In countries with high investment efficiency, a 1-percent-of-GDP increase in public investment boosts output by about 1.6 percent after five years—50 percent higher than in countries with low efficiency. Transparent project selection, rigorous cost-benefit analysis and better procurement are essential.
- Mobilize private capital and deepen capital markets. The private sector already accounts for roughly three-quarters of total investment in EMDEs (Figure 4). Yet mobilizing more will be crucial in an era of scarce public resources. Blended-finance tools, guarantees and risk-sharing facilities can help attract long-term investors, especially in infrastructure, renewable energy and digital connectivity. Stronger financial systems and predictable regulations can channel domestic savings into productive uses, reducing reliance on volatile external flows.
- Invest in human capital. Greater investment in health and education builds a more skilled and adaptable workforce, enabling workers to use physical capital more effectively. It also helps facilitate the development of higher-value sectors. Countries that pair infrastructure development with human-capital formation sustain growth far longer.
Global cooperation. Without a supportive global environment, even the most ambitious domestic reforms could miss the mark.
- Rebuild a predictable, rules-based trading system. Trade and investment move together. Reviving global rules for goods, services and digital trade would reduce uncertainty and revive cross-border flows.
- Expand global finance for development. Multilateral development banks and their partners must mobilize far greater volumes of concessional and private finance through guarantees and first-loss instruments that de-risk investments.
- Support capacity-building. Many low-income and fragile states lack the administrative bandwidth to translate investment plans into projects. Technical assistance in fiscal management, procurement and project preparation can increase returns significantly.
- Forge demographic partnerships. Aging advanced economies and youthful EMDEs share a profoundly symbiotic interest: Productive employment in the latter can sustain demand and stability in the former. Facilitating private investment, legal labor-mobility arrangements and skills partnerships can serve both sides.
A global imperative
Investment may seem like a technical variable in the national accounts, but its implications are profoundly human. Each factory built, each broadband network extended and each classroom constructed represents an opportunity—a chance for a young person to find meaningful work or for a community to lift itself out of poverty.
Population sets the stage, but policy writes the script. If governments pursue credible reforms, if the global community restores cooperation and if the private sector is given the confidence to invest, countries can mobilize the investments needed today to unlock the demographic dividends of tomorrow. The world cannot afford to let the EMDE investment engine stall just as its young generation stands ready to power it forward. The time to invest—boldly, collectively and wisely—is now.
ABOUT THE AUTHOR
Dr. Indermit Gill is the Chief Economist of the World Bank Group and the Senior Vice President for Development Economics. He previously served as the Bank’s Vice President for Equitable Growth, Finance, and Institutions. Before rejoining the World Bank, he was a Professor of Public Policy at Duke University and a Non-Resident Senior Fellow at the Brookings Institution’s Global Economy and Development programme.
M. Ayhan Kose is the Deputy Chief Economist of the World Bank Group and the Director of the Prospects Group. Before joining the World Bank, he served in senior roles at the International Monetary Fund (IMF), supporting its analytical, policy and operational work. He is also a Nonresident Senior Fellow at the Brookings Institution and holds research affiliations with the Centre for Economic Policy Research (CEPR), CAMA and the University of Virginia’s (UVA’s) Darden School of Business.