Global Economic Prospects

Since the global financial crisis in 2009, public investment growth in developing economies has halved. Scaling up public investment by 1% of GDP can increase the level of output by up to 1.6% over the medium term, provided countries have ample fiscal space and efficient public spending practices. To enhance economic prospects, countries should additionally:

• Cut deficits—global cooperation on debt relief is also needed.
• Enhance revenue mobilization by reforming tax administrations and enlarging tax bases. 
• Adopt expenditure measures, such as reprioritizing spending and eliminating costly and inefficient subsidies.

Persistent inflation risks underscore the need for monetary policies to remain focused on price stability. Sound monetary policy can help create an environment in which investment is more likely to surge. Countries should:

• Communicate a steadfast commitment to price stability.
• Ensure central bank independence.
• Enhance financial supervision and strengthen macroprudential policies to mitigate financial stability risks. 

Creating the conditions for a sustained expansion in investment and lasting improvements in longer-term growth hinges on success in implementing well-designed and comprehensive policy packages to foster stability, enhance resilience, and capitalize on their potential. Investment accelerations are often preceded or accompanied by structural reforms, such as:

• Reforms to promote trade, such as lowering tariffs.
• Easing restrictions on capital flows, while mitigating risks. 
• Market-oriented reforms, e.g., reduced barriers to firm entry.
• Investing in assets such as infrastructure and human capital.
• Introducing carbon pricing and reducing fossil fuel subsidies.

Investment accelerations have tended to coincide with better development outcomes, including faster poverty reduction, lower inequality, and improved access to infrastructure. To make growth more inclusive, including by reducing food insecurity and gender gaps, governments should:

• Enhance financial support, broaden access to finance, and boost technical knowledge for farmers.
• Encourage investment in green technology/production.
• Invest in areas like childcare, safe transport, and job re-entry programs, and address restrictive social norms, to encourage female labor force participation. 

In countries with better institutions (such as well-functioning and impartial legal systems) the likelihood of initiating an investment acceleration is higher than in those with weaker institutions. Policymakers can strengthen institutions by:

• Defining and protecting property rights.
• Increasing the independence of the judiciary and strengthening the rule of law.
• Bolstering contract enforcement.
• Improving and unifying regulatory and institutional structures. 
• Increasing transparency.

Comprehensive reforms can alleviate the daunting challenges faced by the world’s small states—those with a population of around 1.5 million or less. Policy priorities to consider include strengthening fiscal frameworks and the tax base and improving spending efficiency. Targeted and coordinated global policies can also help these countries stay on a sustainable fiscal path. 

In commodity-exporting countries, swings in commodity prices create a major challenge for policy makers. Countries can introduce measures to smooth spending and fiscal volatility across the business cycle, such as fiscal rules, sovereign wealth funds, and fiscal institutions that can help build buffers during commodity price booms.