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The Forgotten Rationale For Policy Reform: The Productivity Of Investment Projects

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  • Jonathan Isham
  • Daniel Kaufmann

Abstract

Using economic rates of return from World Bank-funded investments, we investigate how country characteristics and policies that influence aggregate performance affect investment productivity. Controlling for other characteristics, countries with undistorted (distorted) macroeconomic, exchange rate, trade, and pricing policies have highly productive (unproductive) investments. No type of project-in tradable or nontradable sectors-can be ''insulated'' from poor policies, where returns on investments are about ten percentage points lower. Productivity increases when policies improve within a country. Projects are also affected, nonlinearly, by the size of the public investment program where policies are undistorted. The results offer new evidence on benefits from policy reform and challenge conventional cost-benefit analysis. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 114 (1999)
Issue (Month): 1 (February)
Pages: 149-184

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Handle: RePEc:tpr:qjecon:v:114:y:1999:i:1:p:149-184

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Web page: http://mitpress.mit.edu/journals/

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  1. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  2. Isham, Jonathan & Narayan, Deepa & Pritchett, Lant, 1995. "Does Participation Improve Performance? Establishing Causality with Subjective Data," World Bank Economic Review, World Bank Group, vol. 9(2), pages 175-200, May.
  3. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  4. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  5. Liu, Lili, 1993. "Entry-exit, learning, and productivity change Evidence from Chile," Journal of Development Economics, Elsevier, vol. 42(2), pages 217-242, December.
  6. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  7. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  8. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
  9. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  10. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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