Title page

Contents

Foreword 17

Acknowledgments 20

Authors and contributors 22

Abbreviations 23

OVERVIEW 25

Slowing growth, dimming prospects 25

Magnifying challenges 28

One tool for meeting multiple policy priorities 28

Understanding long-term growth: A framework 30

Contributions to the literature 30

Key findings and policy messages 32

Synopsis 44

Future research directions 68

ANNEX OA. Tables 71

References 72

PART I. Potential Growth: An Economy's Speed Limit 79

CHAPTER 1. Potential Not Realized: An International Database of Potential Growth 80

Introduction 80

Database 84

Evolution of potential growth 89

How do short-term shocks affect potential growth? 101

Conclusion 103

ANNEX 1A. Production function approach 108

ANNEX 1B. Univariate filters 112

ANNEX 1C. Multivariate filters 114

ANNEX 1D. Long-term growth expectations 117

ANNEX 1E. Local-projections estimation 118

ANNEX 1F. Tables 119

References 141

CHAPTER 2. Regional Dimensions of Potential Growth: Hopes and Realities 148

Introduction 148

Regional potential growth in the rearview mirror 150

Prospects for regional potential growth 153

Regional reform priorities 155

East Asia and Pacific 157

Europe and Central Asia 170

Latin America and the Caribbean 187

Middle East and North Africa 199

South Asia 210

Sub-Saharan Africa 221

References 233

PART II. Investment: Time for a Big Push 247

CHAPTER 3. The Global Investment Slowdown: Challenges and Policies 248

Introduction 248

Trends and fluctuations in investment growth 252

Macroeconomic backdrop 256

Empirical analysis of investment growth 266

Investment prospects 268

Implications of weak investment growth 270

Policies to promote investment growth 285

Conclusion 292

ANNEX 3A. Determinants of investment growth: Empirical framework 294

ANNEX 3B. Investment growth and reforms 296

ANNEX 3C. Tables 297

References 306

CHAPTER 4. Regional Dimensions of Investment: Moving in the Right Direction? 320

Introduction 320

Investment trends 321

Investment needs 324

Policies to boost investment 327

East Asia and Pacific 329

Europe and Central Asia 339

Latin America and the Caribbean 352

Middle East and North Africa 363

South Asia 373

Sub-Saharan Africa 384

References 395

PART III. Policies: Recognition, Formulation, and Implementation 409

CHAPTER 5. Prospects for Potential Growth: Risks, Rewards, and Policies 410

Introduction 410

Prospects for potential growth 414

Risks to prospects for potential growth: Downside scenario 422

Policies to lift potential growth: Upside scenarios 426

Conclusion 439

ANNEX 5A. Literature review: Effects of economic reforms on growth 442

ANNEX 5B. Methodology: Impact of institutional reform 445

References 447

CHAPTER 6. Trade as an Engine of Growth: Sputtering but Fixable 461

Introduction 461

Trade and growth: A review of the literature 465

Recent trade growth and prospects 476

Patterns in trade costs 482

Correlates of trade costs 484

Policies to lower trade costs 493

Conclusion 499

References 502

CHAPTER 7. Services-Led Growth: Better Prospects after the COVID-19 Pandemic? 510

Introduction 510

How has the services sector shaped economic growth? 513

How has the COVID-19 pandemic affected the services sector's growth? 521

How can digitalization transform opportunities for future services sector growth? 528

What policies can best harness the services sector's growth potential after the COVID-19 pandemic? 533

Conclusion 540

References 542

TABLE 5.1. Sample and region coverage 441

TABLE 6.1. Data employed in the panel regression 501

FIGURE O.1. Growth 27

FIGURE O.2. Drivers of output growth 29

FIGURE O.3. Recessions' lasting damage to potential growth 34

FIGURE O.4. Potential growth 36

FIGURE O.5. Global trade and investment 37

FIGURE O.6. Policy options 39

FIGURE O.7. Evolution of potential growth 47

FIGURE O.8. Potential growth in EMDE regions 50

FIGURE O.9. Global investment 52

FIGURE O.10. Investment in EMDE regions 56

FIGURE O.11. Prospects for potential growth and policies to lift it 60

FIGURE O.12. Reducing trade costs to boost growth prospects 63

FIGURE O.13. The role of services in the global economy 67

FIGURE 1.1. Estimates of potential growth 88

FIGURE 1.2. Comparison of estimates of potential growth 90

FIGURE 1.3. Evolution of potential growth 91

FIGURE 1.4. Drivers of potential growth 92

FIGURE 1.5. Potential growth around the global recessions of 2009 and 2020 95

FIGURE 1.6. Drivers of potential growth around the global recessions of 2009 and 2020 96

FIGURE 1.7. Characteristics of recessions 97

FIGURE 1.8. Effects of recessions on potential growth 99

FIGURE 1.9. Effects of banking crises and epidemics on potential growth 101

FIGURE 1.10. Effects of adverse events on growth of employment, TFP, and investment 104

FIGURE 1.11. Effects of adverse events on growth of employment, TFP, and investment in advanced economies and EMDEs 105

FIGURE 2.1. Actual and potential growth in EMDEs 149

FIGURE 2.2. Potential growth in EMDE regions, 2000-10 and 2011-20 151

FIGURE 2.3. Contributions to potential growth in EMDE regions 153

FIGURE 2.4. EAP: Regional growth in actual and potential output 158

FIGURE 2.5. EAP: Drivers of growth in potential output 161

FIGURE 2.6. EAP: Potential growth-Baseline and reform scenarios 165

FIGURE 2.7. ECA: Output growth and potential growth 171

FIGURE 2.8. ECA: Growth in potential output and its drivers 174

FIGURE 2.9. ECA: Drivers of growth in potential output 177

FIGURE 2.10. ECA: Growth in potential output 183

FIGURE 2.11. LAC: Output growth and drivers of potential growth 189

FIGURE 2.12. LAC: Growth in potential output 191

FIGURE 2.13. LAC: Prospects for potential growth 193

FIGURE 2.14. LAC: Policies to raise growth in potential output 195

FIGURE 2.15. MNA: Output growth and drivers of potential growth 200

FIGURE 2.16. MNA: Growth in potential output 202

FIGURE 2.17. MNA: Policies to raise potential growth 206

FIGURE 2.18. SAR: Output growth and drivers of potential growth 211

FIGURE 2.19. SAR: Growth in potential output 213

FIGURE 2.20. SAR: Policies to raise growth in potential output 217

FIGURE 2.21. SSA: Economic growth and drivers of potential growth 223

FIGURE 2.22. SSA: Obstacles to economic growth and reforms to accelerate potential growth 227

FIGURE 3.1. Investment growth 249

FIGURE 3.2. Growth in private and public investment 253

FIGURE 3.3. Investment around global recessions 254

FIGURE 3.4. Median investment around domestic recessions and terms-of-trade shocks 255

FIGURE 3.5. Commodity prices, terms of trade, and investment growth 257

FIGURE 3.6. Credit growth, debt, and investment growth 258

FIGURE 3.7. Estimated contribution of explanatory variables to predicted investment growth 267

FIGURE 3.8. Outlook for investment growth 268

FIGURE 3.9. Investment compared with trend 270

FIGURE 3.10. Slowdown in growth of investment and trade 281

FIGURE 3.11. Growth of investment, productivity, and potential output 282

FIGURE 3.12. Investment needs related to climate goals and the Sustainable Development Goals in EMDEs 284

FIGURE 3.13. Investment growth around reform spurts and setbacks in EMDEs 288

FIGURE 4.1. Average investment growth, by EMDE region 323

FIGURE 4.2. Regional contributions to EMDE investment and investment growth 324

FIGURE 4.3. Regional prospects for investment growth 325

FIGURE 4.4. EAP: Investment growth 331

FIGURE 4.5. EAP: Investment growth slowdown and investment needs 333

FIGURE 4.6. EAP: Infrastructure, environment, health, and education indicators 334

FIGURE 4.7. ECA: Investment growth and needs 340

FIGURE 4.8. ECA: Investment prospects 343

FIGURE 4.9. ECA: Financing needs and constraints 347

FIGURE 4.10. LAC: Investment growth 354

FIGURE 4.11. LAC: Correlates of investment growth 356

FIGURE 4.12. LAC: Investment needs 358

FIGURE 4.13. MNA: Investment growth and correlates 364

FIGURE 4.14. MNA: Infrastructure, health, and education indicators 368

FIGURE 4.15. SAR: Investment growth and correlates 375

FIGURE 4.16. SAR: Investment needs 378

FIGURE 4.17. SSA: Slowdown in investment growth 386

FIGURE 4.18. SSA: Investment needs 391

FIGURE 5.1. Global output growth and relative per capita incomes 412

FIGURE 5.2. Contributions to potential growth 416

FIGURE 5.3. Total factor productivity growth 417

FIGURE 5.4. Demographics 418

FIGURE 5.5. Evolution of potential growth 419

FIGURE 5.6. Regional growth in potential output 421

FIGURE 5.7. Risks to prospects for potential growth 423

FIGURE 5.8. Policies to strengthen drivers of potential growth 427

FIGURE 5.9. Effect of policies on growth in potential output 429

FIGURE 5.10. Effects of climate-related investment on potential growth 430

FIGURE 5.11. Institutional reforms 438

FIGURE 6.1. Global trade 462

FIGURE 6.2. Factors lowering the elasticity of global trade with respect to global output 477

FIGURE 6.3. Trade during global recessions 479

FIGURE 6.4. Supply chain bottlenecks and trade integration 481

FIGURE 6.5. International trade costs relative to domestic trade costs 485

FIGURE 6.6. International trade policy, border processes, and logistics 487

FIGURE 6.7. International trade costs in EMDEs, by country characteristics 489

FIGURE 6.8. Policies restricting trade in services 491

FIGURE 6.9. Regional trade agreements 494

FIGURE 6.10. Impact of policy improvements on trade costs 497

FIGURE 6.11. Estimated contributions to trade costs 499

FIGURE 7.1. The services sector and structural transformation 515

FIGURE 7.2. The heterogeneity of the services sector 517

FIGURE 7.3. Employment, value added, and productivity in services subsectors 519

FIGURE 7.4. Outward foreign direct investment in the services sector from the United States 522

FIGURE 7.5. Services and manufacturing activity through recessions 522

FIGURE 7.6. The impact of COVID-19 across sectors 524

FIGURE 7.7. COVID-19 and the performance of services subsectors 526

FIGURE 7.8. Adoption of digital technologies in EMDEs 527

FIGURE 7.9. Digitalization and services exports 529

FIGURE 7.10. ICT and intangible capital 531

FIGURE 7.11. Digitalization and innovation in the services sector 532

FIGURE 7.12. Diffusion of ICT among services firms 534

FIGURE 7.13. Digital technology enablers 536

Boxes

BOX 3.1. Investment-less credit booms 259

BOX 3.2. Macroeconomic implications of foreign direct investment in EMDEs 271

BOX 6.1. Understanding the determinants of trade costs 466

Box Tables

TABLE B6.1.1. Panel regression results 470

TABLE B6.1.2A. Panel regression results for subsamples 472

TABLE B6.1.2B. Panel regression results for subsamples 473

Box Figures

FIGURE B3.1.1. Investment and consumption growth during credit booms and deleveraging episodes 261

FIGURE B3.1.2. Coincidence of investment surges and credit booms 263

FIGURE B3.1.3. Output growth during credit booms and deleveraging episodes 264

FIGURE B3.2.1. Trends in FDI since 2000 272

FIGURE B3.2.2. Correlation of FDI, investment, and growth in EMDEs 273

FIGURE B3.2.3. Correlation of FDI, investment, and growth in EMDEs by host country conditions 274

FIGURE B3.2.4. Summary of empirical studies of FDI and investment in EMDEs 276

FIGURE B3.2.5. Summary of empirical studies of FDI and growth in EMDEs 278

Annex Tables

TABLE OA.1. Actual GDP growth 71

TABLE OA.2. Per capita growth 71

TABLE OA.3. Potential GDP growth 71

TABLE 1F.1. Methodology, time, and country coverage 119

TABLE 1F.2. Methods for estimating potential growth 120

TABLE 1F.3. List of variables 121

TABLE 1F.4. Sample coverage for production function-based estimates of potential growth 122

TABLE 1F.5. Regression results for total factor productivity 123

TABLE 1F.6. Regression results for total factor productivity 124

TABLE 1F.7. Regression results for labor force participation rates, baseline 125

TABLE 1F.8. Regression results for labor force participation rates, robustness test: 10-year moving average 127

TABLE 1F.9. Regression results for labor force participation rates, robustness test: Linear-quadratic trend 129

TABLE 1F.10. Coverage for univariate and multivariate filter-based estimates 131

TABLE 1F.11. Coverage for production function approach, filter-based, and expectations-based estimates: Advanced econo 132

TABLE 1F.12. Coverage for production function approach, filter-based, and expectations-based estimates: Emerging market and developing economies 133

TABLE 1F.13. List of banking crises 134

TABLE 1F.14. List of economies affected by epidemics 134

TABLE 1F.15. Impulse responses of potential growth to recessions 135

TABLE 1F.16. Impulse responses of potential growth to recessions: Other measures 136

TABLE 1F.17. Impulse responses of potential growth to banking crises and epidemics 137

TABLE 1F.18. Impulse responses of potential growth to banking crises and epidemics: Other measures 138

TABLE 1F.19. Channels: Impulse responses of total factor productivity, investment, employment, and actual growth rates to recessions 139

TABLE 1F.20. Channels: Impulse responses of total factor productivity, investment, employment, and actual growth rates to banking crises and epidemics 140

TABLE 3C.1. Economies in the investment sample 297

TABLE 3C.2. Correlates of investment growth 298

TABLE 3C.3. Correlates of robustness of investment growth 299

TABLE 3C.4. Investment growth around spurts and setbacks in reform of the investment climate 300

TABLE 3C.5. Estimates of climate-related investment needs 301