Without such investment, the demand for reactive measures can only increase.

Second, the Chinese production mix does not correspond to domestic demand, and investment in long products has outpaced demand growth.

But the opposite of the excessive consumption model excessive reliance on investment to generate aggregate demand is also a self limiting growth pattern. When the private and social returns of investment diminish too much, growth cannot be sustained indefinitely, even though rising investment rates can sustain aggregate demand for a while.

This process is determined by rules of supply and demand, price, investment and financial transaction liberalization.

As far as Chinese demand is concerned, investment in infrastructure is continuing, although the share of capital investment in GDP has been approaching very high levels.

Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private sector investment by increasing returns. Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns.

While France has specialized in consumer goods such as food and pharmaceutical products, Germany is a leading exporter of investment goods. As the current boom in the world economy is largely fueled by investment demand rather consumption demand, only Germany profits from it to full measure.

Water demand management policies could also be used for reducing the waste water volumes and required investment in sewerage.

It is the result of politics and policies in several major economies politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize.

Moreover, public investment works on both the demand and supply sides. It not only boosts aggregate demand directly it also expands potential output by increasing the stock of productivity boosting capital.

It was time to demand that priority should be given to more effective social investment efforts in all national development strategies.

However, to the extent that public investment grows, aggregate demand increases correspondingly, generating some growth and creating a cushion against recession.

Germany, which exports a large volume of investment goods, benefited more than other eurozone member countries from the investment boom in China and other emerging economies. But emerging economy growth is now slowing considerably, including in China, where demand is shifting from investment toward consumption.

What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes. Indeed, given that most investment is financed by debt, and that interest payments are tax deductible, the level of corporate taxation has little effect on investment.

The government is using a variety of instruments, including financial sector credit discipline, to rein in investment demand. Essentially, the government guarantee associated with financing public sector investment is being withdrawn as it should be.

Growth in two components of private demand, residential investment and consumption, which account for more than 75 of total spending in the US economy, has been especially slow. Both sources of demand are likely to strengthen in 2013.

Only the emerging and developing economies of Asia could effectively contribute to lifting global demand through a coordinated effort aimed at boosting domestic consumption, which, in turn, would stimulate additional investment. Recent IMF experience suggests that, through appropriate coordination, private funds could be mobilized for big private public partnership projects linking demand expansion with infrastructure investment.

NEW YORK Some economists overlook the modern idea that a country s prosperity depends on innovation and entrepreneurship. They take the mechanistic view that prosperity is a matter of employment, and that employment is determined by demand government spending, household consumption, and investment demand.

The contraction of private investment in Europe accounts for only a small part (one third) of the growth gap. Though the financial market tensions that accompanied the euro crisis had a strong negative impact on investment in the eurozone periphery, investment demand has also remained weak in the US, minimizing the overall difference.

This could involve a combination of targeting the sanitation needs of the poor and increasing support for hygiene education, which can leverage domestic sanitation demand and investment.

One reason is that investment may never reach its previous levels. If a service based economy simply has less need for expensive fixed capital, why should we expect a return to the days when business investment was a strong component of demand?

Reducing dependence on external demand for example, by promoting private sector investment and encouraging household expenditure is crucial. Supply side policies that promote small and medium size enterprises and service industries accommodating domestic demand are also critical to ensuring more inclusive and sustainable growth.

This means that unless America s domestic savings rate rises mightily which it shows no signs of doing and unless investment expenditure remains abnormally low for the rest of this decade, the supply of loanable funds to finance investment will soon be much less than demand when the current account deficit narrows to sustainable levels. But when supply is less than demand, prices rise sharply.

The demand side measures focused on the removal of a number of specific barriers to investment, as well as on the improvement of the information provided to investors.

The world also faces a serious investment problem, which the low cost of capital has done virtually nothing to overcome. Public sector investment is now below the level needed to sustain robust growth, owing to its insufficient contribution to aggregate demand and productivity gains.

But this investment rate is likely to decline sharply over the next 5 10 years, because the country already boasts new infrastructure, has excess manufacturing capacity in many sectors, and is trying to shift economic activity to services which require less investment. Moreover, China s rapidly aging population and declining working age population will reduce long term investment demand.

Why continue building when you can neither finance your investment nor sell real estate? Russian consumers are already scared and will cut their consumption, causing aggregate demand to contract.

The expected increase in exports will sustain domestic demand in both countries, and the manageable level of inflation that is predicted may sustain consumer confidence, thereby gradually increasing investment.

The pessimists believe that there has been a large decline in the will to invest, something like the loss of animal spirits described by Keynes. Even with very low interest rates, according to this view, investment demand will remain low, and therefore aggregate demand will remain insufficient.

China s economy is prone to rapid growth, with buoyant investment demand sustaining powerful short term inflationary pressures. As a result, credit controls on investment projects and a close watch on the money supply have been used to promote macroeconomic stability since China began its market reforms.

Keynes demonstrated that the main cause of bouts of heavy and prolonged unemployment was not worker encroachment on profits, but the fluctuating prospects of private investment in an uncertain world. Nearly all unemployment in a cyclical downturn was the result of the failure of investment demand.

Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand?

A large part of this was related to investment in natural resources, supported by a strong rise in global commodity prices and growing demand for diamonds, gold, oil, platinum and palladium.

In the eurozone, lower long term rates for government bonds are thus unlikely to improve the corporate sector s financing conditions and boost investment demand. By contrast, in the US, a much larger proportion of investment is financed by issuing bonds, which can have a longer maturity than bank loans.

In the short term, dollar depreciation does not affect supply and demand, but it does affect speculation and investment in oil futures markets. As the dollar declines, commodities including oil attract investors.

First, high commodity prices yield windfall profits for the region s leading producers of raw materials. Growing demand for energy, metals, and minerals particularly in China has driven unprecedented levels of foreign investment.

The economic headwinds are formidable fiscal austerity, high interest rates outside AAA rated countries, credit cutting by banks, deleveraging households, weak private sector investment, and declining exports as the global slowdown undermines demand.

But it is impeded by slow growth and, thanks to high unemployment and weak global demand, persistently low inflation. Worse, over the longer term, low investment undermines productivity, while protracted unemployment destroys skills.

The key to ending the European crisis is a stimulus plan that addresses deficiencies on both the supply and demand sides. That is why Germany s refusal to help find a way to finance the proposed European investment agenda which, for a limited time, would fund productive private investment is a mistake.

The problem with both free market and Keynesian economics is that they misunderstand the nature of modern investment. Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free market model) or because aggregate demand is high (in the Keynesian model).

Keynes (and Keynesians today) would think of the crisis as resulting from the opposite cause under investment relative to the supply of saving that is, too little consumption or aggregate demand to maintain a full employment level of investment which is bound to lead to a collapse of profit expectations.

Some countries are making consistent efforts to revamp exhausted growth models. In China, for example, this involves less reliance on exports and public investment, and more on the private components of domestic aggregate demand.

Finally, the entry of women into economic life has a further positive impact, namely the increase of household income thus favouring demand and consumption of goods and services, as well as saving and investment.

Countries with a stronger fiscal position (that is, smaller structural deficits) should be encouraged to adopt more expansionary policies in order to contribute to lifting overall demand. Moreover, the European Investment Bank s lending capacity could be increased substantially, and European Union structural funds mobilized, to finance investment projects in the peripheral economies.

16. Encourages regional cooperation, including through the private sector and public private partnerships, to intermediate between savings and demand for long term investment in developing countries, including the development, where appropriate, of regional bond markets