Basic economic theory tells us that capital should flow from slow-growing rich countries to faster-growing poor ones in search of higher returns. A decade ago, our former Research Department colleagues Eswar Prasad, Raghuram Rajan, and Arvind Subramanian examined why the reverse had been true—capital generally flowed “uphill” from poorer to richer countries. Building on the seminal work of Robert Lucas, they argued that certain characteristics of poorer countries, such as weaker institutions and lower levels of education, may reduce the risk-adjusted returns to investing there. (more…)
Private investment has been decelerating throughout emerging markets since mid-2011, and Latin America has been no exception (see Chart 1). This trend has raised concerns not only because weaker investment has played an important role in the broader regional slowdown, but also because Latin America’s investment rates were lower than in most other regions even before the slowdown began.
This blog looks at the drivers of corporate investment and highlights the extent to which falling commodity export prices have contributed to lower capital spending. Given the poor outlook for commodity prices and what our analysis suggests, this does not bode well for countries in the region going forward unless they can tackle some of the long-standing obstacles to increase investment.
Countries in the Caucasus and Central Asia region that import, rather than export, oil were hit hard by the Great Recession of 2008/09. The good news is that, today, the outlook for those countries is broadly positive. But, as often seems to be the case in today’s world, this good news is tempered with a word of caution. According to our latest Regional Economic Outlook: Middle East and Central Asia, there are a number of downside risks. And the key challenge for these four countries—Armenia, Georgia, Kyrgyz Republic and Tajikistan—will be to take actions now to address these risks.