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Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa

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  • Serven, Luis

Abstract

A recent, but rapidly growing, literature has focused on the impact of uncertainty and instability on the adoption of fixed investment projects, showing that if the latter are costly or impossible to reverse, uncertainty can become a powerful investment deterrent. The purpose of this paper is twofold. First, to review the recent analytical and empirical literature on irreversible investment, drawing its implications for macroeconomic policy. Second, to gauge the practical importance of the uncertainty-investment link, particularly for Sub-Saharan Africa. To this end, the paper presents empirical evidence on the negative association between investment performance and instability measures using a large cross-country time-series data set. The comparative evidence suggests that uncertainty and instability are important factors behind Africa's poor investment record over the last two decades. Copyright 1997 by Oxford University Press.

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  • Serven, Luis, 1997. "Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 229-268, Supplemen.
  • Handle: RePEc:oup:jafrec:v:6:y:1997:i:3:p:229-68
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    2. Desbordes, Rodolphe, 2007. "The sensitivity of U.S. multinational enterprises to political and macroeconomic uncertainty: A sectoral analysis," International Business Review, Elsevier, vol. 16(6), pages 732-750, December.
    3. Mourad Zmami & Ousama Ben-Salha, 2015. "The adjustment of plant-level investment to exchange rate fluctuations in Tunisia: do the size and the ownership structure matter?," Economics Bulletin, AccessEcon, vol. 35(4), pages 2487-2505.
    4. Patrick GUILLAUMONT, 1999. "On The Economic Vulnerability Of Low Income Countries révisé, cf 2000.16," Working Papers 199916, CERDI.
    5. Rune Jansen Hagen, 2002. "Marginalisation in the Context of Globalisation: Why Is Africa so Poor?," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 28, pages 147-179.
    6. Øivind Anti Nilsen & Fabio Schiantarelli, 2003. "Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1021-1037, November.
    7. Dearmon, Jacob & Grier, Robin, 2011. "Trust and the accumulation of physical and human capital," European Journal of Political Economy, Elsevier, vol. 27(3), pages 507-519, September.
    8. Desbordes, Rodolphe & Vicard, Vincent, 2009. "Foreign direct investment and bilateral investment treaties: An international political perspective," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 372-386, September.
    9. Patrick Guillaumont, 2009. "An Economic Vulnerability Index: Its Design and Use for International Development Policy," Oxford Development Studies, Taylor & Francis Journals, pages 193-228.
    10. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 65(2), pages 491-500, August.
    11. Gode, Constantino J., 2001. "Sovereign Debt and Uncertainty in the Mozambican Economy," WIDER Working Paper Series 130, World Institute for Development Economic Research (UNU-WIDER).
    12. Gul, Adnan, 2008. "Pakistan’s Public Debt: The shocks and aftershocks," MPRA Paper 11427, University Library of Munich, Germany.
    13. Baptist, Simon & Teal, Francis, 2014. "Technology and Productivity in African Manufacturing Firms," World Development, Elsevier, vol. 64(C), pages 713-725.
    14. Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, "undated". "A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints," Economics Working Papers 2000-7, Department of Economics and Business Economics, Aarhus University.
    15. Klaus Mohn & Petter Osmundsen, 2011. "Asymmetry and uncertainty in capital formation: an application to oil investment," Applied Economics, Taylor & Francis Journals, vol. 43(28), pages 4387-4401.
    16. David Stasavage, 2000. "Private Investment and Political Uncertainty," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 25, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    17. Pargal, Sheoli, 2003. "Regulation and private sector investment in infrastructure - evidence from Latin America," Policy Research Working Paper Series 3037, The World Bank.
    18. Gul, Adnan, 2008. "Is external debt an effective way of bringing economic reforms?," MPRA Paper 10979, University Library of Munich, Germany.

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