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The forgotten rationale for policy reform : the productivity of investment projects

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Author Info
Isham, Jonathan
Kaufmann,Daniel

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Abstract

Using economic rates of return from more than 1,200 public and private sector projects implemented in 61 developing countries, the authors analyze determinants of investment productivity. Results from Tobit estimation demonstrate that the degree of countrywide policy distortions - macroeconomic, exchange rate, trade and pricing - critically affects the productivity of investments. Countries with undistorted policies are likely to be unproductive investments. In countries with distorted policies, investments are likely to be unproductive. And within a country, investments become more productive when economic policymaking improves. The productivity of projects in the tradable sectors are also affected (in a nonlinear fashion) by the size of a country's public investment program. The authors discuss possible selection biases in this data set, present tests of robustness, and highlight policy implications. In particular, donor financing for improvements in the policy climate is likely to pay off. A powerful rationale for supporting structual reform is that it raises the productivity of both public and private investments.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1549.

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Date of creation: 30 Nov 1995
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Handle: RePEc:wbk:wbrwps:1549

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Keywords: Payment Systems&Infrastructure; ICT Policy and Strategies; Environmental Economics&Policies; Decentralization; Economic Theory&Research; ICT Policy and Strategies; Environmental Economics&Policies; Economic Theory&Research; Economic Stabilization; Achieving Shared Growth;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Isham, Jonathan & Narayan, Deepa & Pritchett, Lant, 1995. "Does Participation Improve Performance? Establishing Causality with Subjective Data," World Bank Economic Review, Oxford University Press, vol. 9(2), pages 175-200, May.
  3. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 1-118. [Downloadable!]
  4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  5. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September. [Downloadable!] (restricted)
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  7. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jonathan Beynon, 2003. "Poverty Efficient Aid Allocations - Collier/Dollar Revisited," Working Papers 2, Economics and Statistics Analysis Unit (ESAU), Overseas Development Institute. [Downloadable!]
  2. Ismihan, Mustafa & Ozkan, F Gulcin, 2007. "Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance," CEPR Discussion Papers 6139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Sudeshna Ghosh Banerjee & Michael C. Munger, 2004. "Move to markets? An empirical analysis of privatization in developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(2), pages 213-240. [Downloadable!]
  4. Bu, Yisheng, 2004. "Could Foreign-Aid Financing Cause Excess Depreciation of Public Capital? Two Simple Hypothetical Cases," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 34(2), pages 189-202, September. [Downloadable!]
  5. Pierre-Olivier Gourinchas & Olivier Jeanne, 2003. "The Elusive Gains from International Financial Integration," NBER Working Papers 9684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Tito Cordella & Giovanni Dell'Ariccia, 2003. "Budget Support versus Project Aid," IMF Working Papers 03/88, International Monetary Fund. [Downloadable!]
  7. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," RES Working Papers 4597, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Hicks, Robert & Parks, Bradley & Tierney, Michael, 2005. "Explaining the Allocation of Bilateral and Multilateral Environmental Aid to Developing Countries," 2005 Annual meeting, July 24-27, Providence, RI 19346, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  9. Guillaumont, Patrick & Guillaumont Jeanneney, Sylviane, 2007. "Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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  10. Waelbroeck, Jean, 1998. "Half a century of development economics : a review based on the"Handbook of Development Economics"," Policy Research Working Paper Series 1925, The World Bank. [Downloadable!]
  11. Wane, Waly, 2004. "The quality of foreign aid : country selectivity or donors incentives?," Policy Research Working Paper Series 3325, The World Bank. [Downloadable!]
  12. Dollar, David & Levin, Victoria, 2004. "Increasing selectivity of foreign aid, 1984-2002," Policy Research Working Paper Series 3299, The World Bank. [Downloadable!]
  13. Johann Graf Lambsdorff, 2004. "Korrupte Staatsangestellte oder korrupte Regierungen: wer schadet mehr?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(2), pages 200-211.
  14. Carol H. Shiue & Wolfgang Keller, 2004. "Markets in China and Europe on the Eve of the Industrial Revolution," NBER Working Papers 10778, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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