LONG-TERM EFFECTS OF THE PANDEMIC
Report based on findings from World Banks.
Lasting investment losses. History suggests that the adverse effects on investment of the pandemic will linger. After epidemics in the past, losses to investment have been deeper and longer lasting than GDP losses, perhaps because of lasting effects of uncertainty and risk aversion on investment (figure B3.2.3). These same mechanisms, along with sharply lower corporate profits, can be expected to constrain investment during and after the COVID-19 pandemic (Caballero and Simsek 2020; Stiglitz 2020).
Weak investment, a source of slowing potential growth. The prospect of weak investment in EMDEs during the medium to long term, after the severe contraction in 2020, raises concerns about the effects on EMDEs’ potential growth—the growth rate EMDEs can sustain at full employment and capacity. The sustained weakening of investment growth during the 2010s, together with declining total factor productivity growth, has already contributed to a slowdown in labor productivity growth in EMDEs and, as a result, limited EMDEs’ convergence toward per capita income levels in advanced economies (Dieppe 2020).
Upside risk in some sectors. On the other hand, a productivity-enhancing investment surge triggered by the pandemic remains a possibility. This boost could materialize through renewed investment in digital technologies in sectors such as manufacturing, finance, and education, or through the onshoring of production of some essential products (Dieppe 2020). The pandemic also creates opportunities to shift infrastructure investment toward more resilient and environmentally sustainable options, in turn raising productivity and supporting progress toward the SDGs in the long term (Hallegatte and Hammer 2020).
The adverse effect of the COVID-19 pandemic on investment in EMDEs, already large, could extend for a prolonged period. Given the importance of investment in supporting productivity and per capita income gains, it is important that impediments to productive investment, including those related to financing, be reduced. For EMDEs, boosting public investment can have particularly large benefits due to high multipliers (Izquierdo et al. 2020). At the same time, improving business climates and reducing policy uncertainty is key in supporting private investment.