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Fiscal policy and private investment in developing countries : recent evidence on key selected issues

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  • Chhibber, Ajay
  • Dailami, Mansoor

Abstract

This paper discusses the following issues regarding the pace of private domestic investment, its prospects for recovery, and its role in adjustment programs of developing countries: (a) the relationship between stabilization measures affected through aggregate demand management and the need for investment recovery; (b) the complementarity or competitiveness of private and public investment; and (c) the role of capital income taxation as a tool in influencing investment incentives. It also examines the effect of the size of the fiscal deficit and alternative sources of financing the budget deficit on private investment. The key issues here are how these options affect the real interest rate, credit allocation, and the real exchange rate and how those variables in turn affect private investment. The impact of public expenditure decisions on private investment, particularly the different types of public investment choices and their impact on private investment are discussed. The paper examines the implications of tax policy for private investment decision and the effect of tax policy on private investment in the presence of capital market imperfections. It also discusses the impact of inflation in the absence of a fully indexed tax system and provides concluding thoughts.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 559.

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Date of creation: 31 Dec 1990
Date of revision:
Handle: RePEc:wbk:wbrwps:559

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Related research

Keywords: Trade and Regional Integration; Economic Theory&Research; Environmental Economics&Policies; Macroeconomic Management; Financial Intermediation;

References

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  1. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  2. Chhibber, Ajay & van Wijnbergen, Sweder, 1988. "Public policy and private investment in Turkey," Policy Research Working Paper Series 120, The World Bank.
  3. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
  4. Fry, Maxwell J., 1980. "Saving, investment, growth and the cost of financial repression," World Development, Elsevier, vol. 8(4), pages 317-327, April.
  5. Khan, Mohsin S. & Reinhart, Carmen M., 1990. "Private investment and economic growth in developing countries," World Development, Elsevier, vol. 18(1), pages 19-27, January.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  7. van Wijnbergen, Sweder, 1983. "Credit policy, inflation and growth in a financially repressed economy," Journal of Development Economics, Elsevier, vol. 13(1-2), pages 45-65.
  8. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
  9. Buiter, W.H., 1988. "Some Thoughts On The Role Of Fiscal Policy In Stabilisation And Structural Adjustment In Developing Countries," Papers 312, London School of Economics - Centre for Labour Economics.
  10. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  11. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
  12. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
  13. Balassa, Bela, 1988. "Public finance and economic development," Policy Research Working Paper Series 31, The World Bank.
  14. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
  15. Dailami, Mansoor & Walton, Michael, 1989. "Private investment, government policy, and foreign capital in Zimbabwe," Policy Research Working Paper Series 248, The World Bank.
  16. Ogura, Seiritsu & Yohe, Gary, 1977. "The Complementarity of Public and Private Capital and the Optimal Rate of Return to Government Investment," The Quarterly Journal of Economics, MIT Press, vol. 91(4), pages 651-62, November.
  17. Chhibber, Ajay & Shafik, Nemat, 1990. "Does devaluation hurt private investment? The Indonesian case," Policy Research Working Paper Series 418, The World Bank.
  18. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
  19. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. Gelb, Alan H., 1989. "Financial policies, growth, and efficiency," Policy Research Working Paper Series 202, The World Bank.
  21. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
  22. Buffie, Edward F., 1984. "Financial repression, the new structuralists, and stabilization policy in semi-industrialized economies," Journal of Development Economics, Elsevier, vol. 14(3), pages 305-322, April.
  23. Dailami, Mansoor & Hinh T. Dinh, 1991. "Interest rate policy in Egypt : its role in stabilization and adjustment," Policy Research Working Paper Series 655, The World Bank.
  24. Faini, Riccardo & de Melo, Jaime, 1990. "Adjustment, investment, and the real exchange rate in developing countries," Policy Research Working Paper Series 473, The World Bank.
  25. Chhibber, Ajay & Khalilzadeh-Shirazi, Javad, 1988. "Public finance in adjustment programs," Policy Research Working Paper Series 128, The World Bank.
  26. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  27. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, vol. 38(152), pages 395-412, November.
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Citations

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Cited by:
  1. Afia Malik, 2013. "Private Investment And Fiscal Policy In Pakistan," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(1), pages 83-109, March.
  2. Schweickert, Rainer & Wiebelt, Manfred, 1996. "Finanzpolitik im Aufholproze├č : Lehren aus Europa, Lateinamerika und Asien," Open Access Publications from Kiel Institute for the World Economy 1689, Kiel Institute for the World Economy (IfW).
  3. Pillai N., Vijayamohanan, 2008. "Infrastructure, Growth And Human Development In Kerala," MPRA Paper 7017, University Library of Munich, Germany.
  4. Faini, Riccardo & de Melo, Jaime, 1991. "Fiscal issues in adjustment : an introduction," Policy Research Working Paper Series 724, The World Bank.
  5. Matin, Kazi M., 1992. "Fiscal adjustment and the real exchange rate : the case of Bangladesh," Policy Research Working Paper Series 850, The World Bank.
  6. Matin, Kazi M. & Wasow, Bernard, 1992. "Adjustment and private investment in Kenya," Policy Research Working Paper Series 878, The World Bank.
  7. Jimenez, Emmanuel & DEC, 1994. "Human and physical infrastructure : public investment and pricing policies in developing countries," Policy Research Working Paper Series 1281, The World Bank.

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