## Why Investment May Come Under Threat

_IMF Blog, April 3, 2019_

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## Bibliographic details
- Authors: Weicheng Lian, Natalija Novta, Petia Topalova
- Published: April 3, 2019

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### Summary and framing
- Authors: Weicheng Lian, Natalija Novta, Petia Topalova
- Publication date: April 3, 2019
- Context: Chapter 3 of the April 2019 World Economic Outlook
- Core premise: Trade tensions and sluggish productivity growth could slow the decline in the relative price of machinery and equipment, which would hold back investment growth worldwide.

### Historical trends in relative prices and drivers
- Since 1990, the price of machinery and equipment relative to the price of consumption fell about 60 percent in advanced economies and about 40 percent in emerging market and developing economies.
- The relative price of computing equipment declined about 90 percent since 1990.
- Relative prices of housing and commercial structures more closely tracked the price level of consumption (i.e., did not fall as dramatically).
- Trade integration was the biggest factor behind falling prices of machinery and equipment relative to consumption, based on analysis using detailed price data across more than 30 sectors in 40 economies.
  - Greater competition from abroad led domestic capital goods producers to lower prices and raise productivity.
  - Trade contributed up to 60 percent of the observed fall in the relative price of machinery and equipment between 2000 and 2011.
- Faster growth in the productivity of capital goods production, from sources other than trade, also helped lower relative prices.

### Effects of relative price declines on investment
- The decline in the price of capital goods relative to consumption provided a sizable boost to real investment.
- Model simulations indicate that a decline in the relative price of investment, due to a cut in capital goods tariffs or a boost in the efficiency of capital goods production, leads to a permanent and sizable increase in real investment rates.
- Colombia case study:
  - A 1 percentage point reduction in tariffs on capital goods resulted in a 0.4 percentage point increase in investment.
- Empirical finding for emerging market and developing economies:
  - About one-third of the increase in the real investment rate in machinery and equipment in the past three decades can be attributed to the cheapening of capital goods relative to consumption; stronger macroeconomic policies and other factors contributed the rest.
- The slowdown in the decline of the relative price of investment in the past 10 years may have provided an additional drag to the weak investment growth observed since the global financial crisis.

### Policy implications and recommendations
- Trade policy:
  - Avoid protectionist measures and revive trade liberalization to help maintain the pace of decline in the relative price of capital goods.
  - With tariffs on capital goods averaging about 4 percent in emerging markets and 8 percent in low-income developing countries, there is scope to lower trade barriers.
  - In lower-income countries, fully implementing commitments under the World Trade Organization’s Trade Facilitation Agreement could reduce nontariff trade costs by the equivalent of a 15-percentage point tariff cut.
- Innovation and supply-side policies:
  - Support innovation in the capital goods producing sector in both advanced and emerging market and developing economies.
  - Policies to encourage research and development, entrepreneurship, and technology transfer are crucial.
  - Continued investment in education and public infrastructure can support productivity in capital goods production.
- Labor and social policies:
  - Policymakers must be mindful of difficulties some workers and industries may face as the relative prices of machinery and equipment fall.
  - The decline in the relative price of investment has eroded the share of income that goes to workers in economies where many jobs can be easily automated.
  - Recommended policies include sufficiently broad social safety nets and programs to support retraining, skill building, and occupational and geographic mobility.

*Source: Why Investment May Come Under Threat — April 3, 2019 (Chapter 3, April 2019 World Economic Outlook).*

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## Content in this bundle

- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/-/media/files/publications/sdn/2017/sdn1704.pdf.md){rel="alternate" type="text/markdown"}
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## References

- [Chapter 3 of the April 2019 World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019)
- [https://www.imf.org/wp-content/uploads/2019/04/weoch3-1.png](https://www.imf.org/wp-content/uploads/2019/04/weoch3-1.png)
- [https://www.imf.org/wp-content/uploads/2019/04/weoch3-2.png](https://www.imf.org/wp-content/uploads/2019/04/weoch3-2.png)
- [global financial crisis](https://blogs.imf.org/2018/10/03/lasting-effects-the-global-economic-recovery-10-years-after-the-crisis/)
- [https://www.imf.org/wp-content/uploads/2019/04/weoch3-3.png](https://www.imf.org/wp-content/uploads/2019/04/weoch3-3.png)
- [innovation](https://blogs.imf.org/2016/03/31/imagine-what-fiscal-policy-could-do-for-innovation/)
- [earlier](https://blogs.imf.org/2017/04/12/drivers-of-declining-labor-share-of-income/)

_Source: https://www.imf.org/en/blogs/articles/2019/04/03/blog-weo-ch3-why-investment-may-come-under-threat_