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How inadequate provision of public infrastructure and services affects private investment

  • Reinikka, Ritva
  • Svensson, Jakob

Lack of private investment is a serious policy problem in many developing countries, especially in Africa. Despite recent structural reform and stabilization, the investment response to date has been mixed, even among the strongest reformers. The role of poor infrastructure and deficient public services has received little attention in the economic literature, where the effect of public spending and investment on growth is shown to be at best ambiguous. The authors use unique microeconomic evidence to show the effects of poor infrastructure services on private investment in Uganda. They find that poor public capital, proxied by an unreliable and inadequate power supply, significantly reduces productive private investment. Firms ca substitute for inadequate provision of public capital by investing in it themselves. This comes at a cost, however: the installation of less productive capital. These results have clear policy implications. Although macroeconomic reforms and stabilization are necessary conditions for sustained growth and private investment, without an accompanying improvement in the public sector's performance, the private supply response to macroeconomic policy reform is likely to remain limited.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2262.

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Date of creation: 31 Dec 1999
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Handle: RePEc:wbk:wbrwps:2262
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  1. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
  2. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
  3. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  4. Arne Bigsten & Paul Collier & Stefan Dercon & Bernard Gauthier & Jan Willem Gunning & Anders Isaksson & Abena Oduro & Remco Oostendorp & Cathy Pattillo & Måns Söderbom & M. Sylvain & Francis Teal & Al, 1997. "Investment in Africa's manufacturing sector: A four country panel data analysis," CSAE Working Paper Series 1997-11, Centre for the Study of African Economies, University of Oxford.
  5. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  6. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
  7. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  8. Tybout, James R, 1983. "Credit Rationing and Investment Behavior in a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 598-607, November.
  9. Ablo, Emmanuel & Reinikka, Ritva, 1998. "Do budgets really matter? - evidence from public spending on education and health in Uganda," Policy Research Working Paper Series 1926, The World Bank.
  10. Reinikka, Ritva & Svensson, Jakob, 1999. "Confronting competition - investment response and constraints in Uganda," Policy Research Working Paper Series 2242, The World Bank.
  11. Easterly, William, 1997. "The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics," Policy Research Working Paper Series 1807, The World Bank.
  12. Catherine A. Pattillo, 1997. "Investment, Uncertainty, and Irreversibility in Ghana," IMF Working Papers 97/169, International Monetary Fund.
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