Weak Private Investment Trends in EMDEs: What Can Governments Do About It?

This paper begins by looking at private investment and bank credit to the private sector as a share of GDP in EMDEs in this century. It finds worrisome levels and trends, especially compared to private investment ratios for economies that achieved sustained high growth in the last century. As exogenous shocks proliferate and growth slows, EMDEs need better evidence on structural policies that help boost private investment ratios. The World Bank’s new B-Ready database scores governments’ investment-related policies and services across nearly 1,200 indicators per economy (for an initial sample of 50 economies), organized into 10 topics and 3 pillars. The paper tests the hypothesis that there are significant correlations between these scores and private investment outcomes. The B-Ready detail helps governments identify areas of strength and weakness. But governments need help in setting priorities across nearly 1,200 indicators. Setting priorities requires evidence not only about the scores themselves but also about which indicators are most correlated with actual private finance flows. Taking due account of the limitations of analysis based on correlations, our findings suggest that, as a point of departure, governments would do well to pay attention to policies and systems that confer economy-wide benefits attractive to private finance providers. While there are differences between foreign investors, domestic investors, and bank lenders, the evidence points overall to the importance of trade openness; strong and efficient e-payment systems; better access to data for assessing creditworthiness; policies and systems for protecting competition; support for local innovation (including intellectual property protection for domestic innovators); opening up government procurement; and well-functioning dispute settlement mechanisms that don’t require court litigation. The cost of making and receiving e-payments and trade openness stand out as significant factors for all three sources of finance.