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IMF says rise in real investment coincided with large drops in price of machinery and equipment


The International Monetary Fund (IMF) has said that trade tensions and sluggish productivity growth can slow the decline in relative prices of machinery and equipment, which may hold back investment growth worldwide.
More broadly, the empirical analysis shows that for average emerging markets and developing economies, about one-third increase in real investment rate in machinery and equipment over 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. However, prices of machinery and equipment have been falling relative to overall prices for decades, largely due to rising trade and sweeping technological improvements that led to the more efficient production of capital goods.
This has helped countries around the world raise real investment and improve living standard, said economists at IMF's Research Department Weicheng Lian, Natalija Novta and Petia Topalova.
"But this important driver of the investment may be under threat. 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," they said in a joint analysis.
Since 1990, the price of machinery and equipment relative to the price of consumption fell about 60 per cent in advanced economies and about 40 per cent in emerging market and developing economies.
Supporting innovation in the capital goods producing sector in both advanced and emerging market and developing economies is crucial. Policies that encourage research and development, entrepreneurship, technology transfer as well as continued investment in education and public infrastructure can also help.
"But policymakers must also be mindful of the 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," said the IMF economists.
Policies should be designed to help workers cope with potential job disruptions, including sufficiently broad social safety nets, as well as programmes to support retraining, skill building, and occupational and geographic mobility.
The most striking was fall in the relative price of computing equipment, which declined about 90 per cent since 1990.
These were dramatic declines when compared with relative prices of other types of capital assets such as housing and commercial structures, which more closely tracked the price level of consumption.
Trade integration has been the biggest factor behind falling prices of machinery and equipment relative to the price of consumption, based on analysis using detailed price data across more than 30 sectors in 40 economies, said the IMF economists.

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First Published: Apr 28 2019 | 10:36 AM IST

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