World Bank – Accelerating Investment: Challenges and Policies.

Sept 2025 : Investment is the cornerstone of economic growth and sustainable development. This volume provides the most comprehensive and rigorous assessment of investment dynamics in emerging and developing economies to date. Drawing on cutting-edge research and rich case studies, the volume explores the drivers of public, private, and foreign investment, highlights the transformative power of investment accelerations, and distills practical policy lessons. At a time when emerging and developing economies face a massive investment shortfall and financing needs are mounting, this book offers both a diagnosis of the challenges and a roadmap for reigniting momentum. It is an essential resource for policymakers, scholars, and practitioners committed to unlocking investment as an engine of inclusive and sustainable development.  

Developing economies needs higher investment. Investment is the engine that builds productive capacity, modernises infrastructure, sets the stage for job growth, and advances countries toward development and climate goals. Yet as development needs have expanded, investment growth has been in a deep slump a call to action for policymakers, investors, and development practitioners.

Developing economies today face an investment shortfall of historic proportions. Meeting even the most modest development goals will require a huge investment push on the order of 5% of global GDP per year. For low-income countries, the financing gap is about 8% of GDP annually. It’s a prohibitive price tag that runs into trillions of dollars over the next decade. Yet even as development needs have ballooned, investment flows have ebbed. Since the global financial crisis of 2008–09, investment growth in emerging market and developing economies (EMDEs) has slowed to about half the pace in the 2000’s. The growth of private investment, in particular, halved from double-digit rates in the 2000’s to less than 7% in the 2010’s. Foreign direct investment (FDI) inflows— a critical source of capital, technology, and managerial know-how—weakened and became concentrated in a handful of economies. This tension—between burgeoning needs and dwindling resources defines the challenge at the center of this book. Without a renewed wave of capital formation, EMDEs will not be able to engineer lasting growth, create sufficient jobs, and meet even modest development objectives.

Why does investment matter so much?

First, it is the foundation of long-term growth. In EMDE’s, investment has accounted for more than half of potential growth since 2000.

Second, it is the engine of job creation. Investment spurs labour reallocation toward more productive sectors, boosting both employment and job quality. During accelerations, employment growth rises steadily, particularly in manufacturing and services.

Third, investment is necessary for meeting the most basic development needs. Almost 740 million people still lack access to electricity; one-quarter of the world lacks safe drinking water; and digital infrastructure in many EMDEs remains rudimentary. Bridging these gaps requires sustained investments in infrastructure, climate, energy, education, health, and technology.

In short, the case for higher investment is overwhelming. But the obstacles are equally formidable. Domestically, many EMDE’s grapple with weak fiscal space, feeble government institutions, shallow financial systems, and high policy uncertainty. During the last two decades, public investment has been sapped by high debt levels and spending cuts in the aftermath of financial and other crises. Private investment has been deterred by policy uncertainty, weak contract enforcement, limited access to finance, and infrastructure bottlenecks. Across the world, the retreat of trade and financial integration, the proliferation of restrictions on investment flows, and heightened geopolitical tensions have raised risks and reduced opportunities. Fragmentation is closing off the channels—trade, technology transfer, cross-border capital—that supported past investment accelerations.

Successful investment accelerations are rarely the result of isolated reforms; they result from comprehensive packages that stabilise the macroeconomy, expand openness, and strengthen institutions. Major structural reforms in EMDE’s, trade and financial integration, product market reforms, individually boost private investment by about 01% to 02% cumulatively over three years. When implemented together, the effects of reforms multiply. A combination of reforms that strengthen trade and financial linkages and improve the functioning of product markets increases the

probability of a private investment acceleration by more than 10 percentage points.

Similarly, the growth payoff to public investment is about 50% higher in countries with ample fiscal space and high investment efficiency. Foreign Direct Investment (FDI) delivers nearly three times the growth boost in countries with strong institutions, better human capital, and greater trade linkages. These complementarities highlight a critical finding: coordinated reforms can precipitate a rising tide of national economic benefits.

The policy priorities for EMDEs follow from these findings.

• They must improve their investment climate by reinstituting macroeconomic stability, reigniting structural reforms, and restoring fiscal space.

• They must raise the efficiency of public investment—through better project selection, execution, and evaluation.

• They must implement structural reforms that reduce policy uncertainty, integrate markets with the global economy, and deepen access to finance.

But domestic policy alone will not be sufficient for a small economy, which is what most EMDE’s are. Globally, a renewed commitment to a predictable, rules-based system of trade and investment is essential. So, too, is scaled-up international financial support, particularly for low-income countries, through concessional finance, and guarantees, complemented with policy advice and technical assistance.

Policy makers around the world are searching for ways to boost growth and create jobs, and investment lies at the heart of that effort. A higher investment growth rate is consistently linked to faster productivity and output growth, as more capital per worker fuels innovation and efficiency. History shows that countries experiencing rapid investment growth often enjoy powerful output growth spurts, accompanied by job creation, and broad macroeconomic gains. In fact, investment accelerations episodes of rapid, sustained investment growth have repeatedly served as turning points, setting economies on stronger and more durable growth paths.

Investment accelerations, periods of annual per capita investment growth averaging at least 04% for 06 or more years have coincided with significant increases in the employment ratio and a sectoral shift in employment from agriculture to the more productive manufacturing and services sectors.

Employment growth is particularly strong in the manufacturing and services sectors during investment accelerations. These dynamics underscore why job creation depends critically on sustained investment growth. Stronger investment generates not only more jobs, but also better jobs, enabling faster poverty reduction and broader improvements in living standards. The link between investment and jobs works through several channels. At the firm level, investment in productivity-enhancing activities is associated with higher job creation. Firms that gain access to financial markets, especially young firms, invest more and create jobs. Public and private investment generate indirect employment effects when they remove growth constraints, such as through investments in information and communications technology, transportation infrastructure, or electricity generation and distribution.

Furthermore, public investment in worker retraining and human capital accumulation has positive long-term effects on employment. What is equally important is that, investment plays a central role in the process of structural transformation. Investment facilitates the reallocation of labor into manufacturing and services, raising overall productivity and boosting growth. It also promotes agricultural productivity by financing new technologies. The quality of investment also matters: investment in health, education, and digital infrastructure builds human capital and intangible assets that underpin long-term prosperity. In this way, investment operates not only as a driver of growth today, but also as a foundation for inclusive and sustainable development tomorrow.

As asserted earlier, the need for higher investment is particularly acute in EMDE’s. These economies must simultaneously sustain growth, reduce poverty, and address mounting climate challenges. Yet their investment levels remain far below what is required. The infrastructure shortfalls alone are staggering: universal access to electricity, clean water, and sanitation remains out of reach for significant portions of the population. Meanwhile, the digital economy, an increasingly critical driver of competitiveness requires rapid expansion of broadband networks, data infrastructure, and intangible capital. Bridging these gaps will require unprecedented mobilization of both public and private resources. But even under optimistic assumptions, domestic public investment can cover only about one-third of the needed increase. The rest must come from private capital— both domestic and foreign—and from greater support by the international community through concessional Finance, guarantees, and technical assistance. Without a dramatic scaling-up, EMDEs risk falling further behind in meeting development and climate objectives. 

The slowdown in domestic investment has been compounded by a parallel weakening in FDI inflows to EMDEs. During the boom years of 2000-08, net FDI inflows to EMDEs expanded fivefold, rising from just over $160 billion in 2000 to nearly $800 billion in 2008. As a share of GDP, FDI inflows to a typical EMDE climbed from about 02% at the beginning of the 2000’s to a peak of almost 05% in 2008. This

surge lifted EMDEs’ share of global FDI from one-tenth to one-third, underscoring their growing importance as investment destinations. Since the global financial crisis, however, FDI inflows have steadily eroded. By 2022-23, the FDI-to-GDP ratio in EMDEs had fallen to just over 02%, more than halving from its 2008 peak. The retreat was widespread, with about three-fifths of EMDEs receiving smaller capital inflows as a share of GDP in 2012-23 compared with 2000-11.

Moreover, the distribution of FDI has been highly concentrated. Over two-thirds of FDI inflows to EMDEs in the past decade went to only ten countries. China alone absorbed about one-third of inflows between 2012 and 2023, while Brazil and India accounted for another one-sixth. By contrast, LICs attracted only 2 percent of all inflows to EMDE’s, which is less than 01% of the global total, highlighting the uneven access to foreign capital.

Regional patterns reveal a similar concentration. East Asia and Pacific (EAP) received more than two-fifths of EMDE inflows during 2012-23, followed by one-quarter to Latin America and the Caribbean (LAC) and one-sixth to Europe and Central Asia (ECA). Sub-Saharan Africa (SSA) and the Middle East and North Africa (MNA) remained marginal recipients.

Team Maverick