Fiscal Policy and Private Investment in Developing Countries: Recent Evidence on Key Selected Issues

The importance of private domestic investment to the growth and development strategy of developing countries in the transition to the 1990s is emerging with particular clarity from the convergence of two strands of empirical and policy concerns. One is the evidence that in almost all these countries, over the past decade, domestic investment has borne the brunt of the aggregate demand contraction associated with the process of external adjustment. (Figure a and Table 1) The second, which derives partly from the first, is the growing agreement on the desirability of increasing the private sector’s share in total capital formation through increased reliance on market forces and incentives. Accordingly, it is now widely accepted that expansion of private investment should be the main impetus for economic growth, allowing public investment resources gradually to focus on social areas, including alleviation of poverty and the upgrading of social capital and services.