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Uncertainty, instability, and irreversible investment : theory, evidence, and lessons for Africa

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  • Serven, Luis

Abstract

A recent (but rapidly growing) literature has focused on how uncertainty and instability affect the adoption of fixed investment projects. That literature shows that if fixed investment projects are costly or impossible to reverse, uncertainty can become a powerful deterrent to investment. The author reviews the literature on irreversible investment to identify the implications for macroeconomic policy and to gauge the practical importance, especially for sub-Saharan Africa, of the link between uncertainty and investment. He presents empirical evidence on the negative association between investment performance and measures of instability, using cross-section time-series data. That evidence suggests that instability and uncertainty are important factors in Africa's poor investment record over the last two decades.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1722.

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Date of creation: 28 Feb 1997
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Handle: RePEc:wbk:wbrwps:1722

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Keywords: Economic Theory&Research; International Terrorism&Counterterrorism; Environmental Economics&Policies; Fiscal&Monetary Policy; Decentralization; Environmental Economics&Policies; ICT Policy and Strategies; Trade and Regional Integration; Economic Theory&Research; International Terrorism&Counterterrorism;

References

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Citations

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Cited by:
  1. Ahmet Faruk AYSAN & Mustapha Kamel NABLI & Marie-Ange VÉGANZON�S-VAROUDAKIS, 2007. "Governance Institutions And Private Investment: An Application To The Middle East And North Africa," The Developing Economies, Institute of Developing Economies, Institute of Developing Economies, vol. 45(3), pages 339-377.
  2. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
  3. Toan Quoc Nguyen & Benedict J. Clements & Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers, International Monetary Fund 03/249, International Monetary Fund.
  4. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers, Tinbergen Institute 06-060/3, Tinbergen Institute.
  5. Marie-Ange VEGANZONES-VAROUDAKIS & NABLI & Ahmet Faruk AYSAN, 2006. "Governance and Private Investment in the Middle East and North Africa," Working Papers 200627, CERDI.
  6. Ahmet Faruk Aysan & M-A Veganzones-Varoudakis, 2007. "How Do Political and Governance Institutions Affect Private Investment Decisions? An Application to the Middle East and North Africa," Working Papers, Bogazici University, Department of Economics 2007/05, Bogazici University, Department of Economics.
  7. Robert Lensink, 2002. "Is the uncertainty-investment link non-linear? Empirical evidence for developed economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 138(1), pages 131-147, March.
  8. Chen,Derek Hung Chiat & Ranaweera,Thilakaratna & Storozhuk, Andriy, 2004. "The RMSM-S+P : a minimal poverty module for the RMSM-X," Policy Research Working Paper Series 3304, The World Bank.

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