Moving Forward When There Are No Dollars: A Guide to Public Investment in Face of the Balance-of-Payments Constraint

The dominant approach of international organizations and financial institutions to development finance focuses on incentivizing and mobilizing private capital to achieve the international community's goals in terms of economic, social and environmental development while the public sector's financial capacity is supposedly restricted. Yet, this approach dismisses the nature of money as being endogenous, which implies that domestic banking systems can accommodate the demand for finance. The essential constraint, notably from the perspective of low-income countries, is not finance per se but the lack of foreign exchange. To distinguish true from false finance gaps, it is necessary for a country to know whether its investment plans rely on foreign currency. This analysis develops a guide to public investment based on the balance-of-payments-constrained growth model. It helps policymakers develop investment plans by assessing reliance on foreign exchange and the space available to make public investments via the domestic banking system. To illustrate its practical use, the guide is applied to a simple stylized example of a national investment plan.