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

  • Chhibber, Ajay
  • Dailami, Mansoor

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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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
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Handle: RePEc:wbk:wbrwps:559
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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. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
  3. 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.
  4. 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.
  5. Chhibber, Ajay & Khalilzadeh-Shirazi, Javad, 1988. "Public finance in adjustment programs," Policy Research Working Paper Series 128, The World Bank.
  6. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
  7. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. Willem H. Buiter, 1988. "Some Thoughts on the Role of Fiscal Policy in Stabilisation and Structural Adjustment in Developing Countries," NBER Working Papers 2603, National Bureau of Economic Research, Inc.
  15. 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.
  16. Fry, Maxwell J., 1980. "Saving, investment, growth and the cost of financial repression," World Development, Elsevier, vol. 8(4), pages 317-327, April.
  17. 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.
  18. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
  19. Chhibber, Ajay & Shafik, Nemat, 1990. "Does devaluation hurt private investment? The Indonesian case," Policy Research Working Paper Series 418, The World Bank.
  20. 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.
  21. Balassa, Bela, 1988. "Public finance and economic development," Policy Research Working Paper Series 31, The World Bank.
  22. 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.
  23. Dailami, Mansoor & Walton, Michael, 1989. "Private investment, government policy, and foreign capital in Zimbabwe," Policy Research Working Paper Series 248, The World Bank.
  24. 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.
  25. 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.
  26. Gelb, Alan H., 1989. "Financial policies, growth, and efficiency," Policy Research Working Paper Series 202, The World Bank.
  27. Chhibber, Ajay & van Wijnbergen, Sweder, 1988. "Public policy and private investment in Turkey," Policy Research Working Paper Series 120, The World Bank.
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