A DISCUSSION PAPER IFD41 June 2000 Trends in Private Investment in Developing Countries Statistics for 1970-1998 Lawrence Bouton Mariusz A. Sumlinski INTERNATIONAL FINANCE CORPORATION IFC Discussion Papers No. 1 Private Business in Developing Countries: Improved Prospects. Guy P. Pfeffermann No. 2 Debt-Equity Swaps and Foreign Direct Investment in Latin America. Joel Bergsman and Wayne Edisis No. 3 Prospects for the Business Sector in Developing Countries. Economics Department, IFC No. 4 Strengthening Health Services in Developing Countries through the Private Sector. Charles C. Griffin No. 5 The Development Contribution of IFC Operations. Economics Department, IFC No. 6 Trends in Private Investment in Thirty Developing Countries. Guy P. Pfeffermann and Andrea Madarassy No. 7 Automotive Industry Trends and Prospects for Investment in Developing Countries. Yannis Karmokolias No. 8 Exporting to Industrial Countries: Prospects for Businesses in Developing Countries. Economics Department, IFC No. 9 African Entrepreneurs-Pioneers of Development. Keith Marsden No. 10 Privatizing Telecommunications Systems: Business Opportunities in Developing Countries. William W. Ambrose, Paul R. Hennemeyer, and Jean-Paul Chapon No. 11 Trends in Private Investment in Developing Countries, 1990-91 edition. Guy P. Pfeffermann and Andrea Madarassy No. 12 Financing Corporate Growth in the Developing World. Economics Department, IFC No. 13 Venture Capital: Lessons from the Developed World for the Developing Markets. Silvia B. Sagari with Gabriela Guidotti No. 14 Trends in Private Investment in Developing Countries, 1992 edition. Guy P. Pfeffermann and Andrea Madarassy No. 15 Private Sector Electricity in Developing Countries: Supply and Demand. Jack D. Glen No. 16 Trends in Private Investment in Developing Countries 1993: Statistics for 1970-91. Guy P. Pfeffermann and Andrea Madarassy No. 17 How Firms in Developing Countries Manage Risk. Jack D. Glen No. 18 Coping with Capitalism: The New Polish Entrepreneurs. Bohdan Wyznikiewicz, Brian Pinto, and Maciej Grabowski No. 19 Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer. Edwin Mansfield No. 20 Trends in Private Investment in Developing Countries 1994: Statistics for 1970--92. Robert Miller and Mariusz Sumlinski (Continued on the inside back cover.) INTERNATIONAL FINANCE I BE @ CORPORATION DISCUSSION PAPER NUMBER 41 rends in Private Investment in Developing Countries Statistics for 1970-1998 Lawrence Bouton Mariusz A. Sumlinski The World Bank Washington, D.C. Copyright © 2000 The World Bank and International Finance Corporation 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 2000 The International Finance Corporation (IFC), an affiliate to the World Bank, promotes the economic development of its member countries through investment in the private sector. It is the world's largest multilateral organization providing financial assistance directly in the form of loan and equity to private enterprises iU developing countries. To present the results of research with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the IFC and the World Bank accept no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the IFC or the World Bank or to members of their Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Some sources cited in this paper may be informal documents that are not readily available. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete inforrmation to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISSN (IFC Discussion Papers): 1012-8069 ISBN 0-8213-4785-3 Lawrence Bouton is an economist and Mariusz A. Sumlinski is a research analyst at the International Finance Corporation. Library of Congress Cataloging-in-Publication Data has been applied for. iii Table of Contents FOREWORD ......................................................... V ABSTRACT ......................................................... VII CHAPTER 1 - PRIVATE INVESTMENT AND ECONOMIC GROWTH ............................................ 1 RECENT EVIDENCE .......................................................... 2 EXISTING EMPIRICAL LITERATURE ......................................................... 3 INTERPRETING THE RESULTS. .......... ............................................... 6 ANNEX: EXPLAINING ECONOMIC GROWTH ......................................................... 8 A. HARROD-DOMAR ......................................................... 8 B. SOLOW AND THE NEOCLASSICAL GROWTH MODEL . ......................................................... 0 C. ENDOGENOUS GROWTH ....... .................................................. 13 REFERENCES .......................................................... 16 CHAPTER 2 - PRIVATE AND PUBLIC INVESTMENT TRENDS .................................................... 21 APPENDIX 1: METHODS AND SOURCES ......................................................... 25 APPENDIX 2 - COUNTRY CHARTS ......................................................... 27 Sub - Saharan Africa . .............. ., 29 Latin America and the Caribbean ....................... 33 Middle East, and North Africa .................... ,... 37 Transition Countries .............39,,,,....,,,,,,,,........,, 39 East Asia ....1..... ............ ............ .. , , , . ...................,,,,,,,,,....,, 41 South Asia.45 ......... ..........., , , , , ,,,,,., . 45 v Foreword This eleventh annual edition of Trends in Private Investment in Developing Countries provides private and public investment data through 1998. Information on the breakdown of total investment into its public and private components is not readily available from standard national account statistics. Where it may be available, the concept of public investment is not always precise. Most standard measures classify capital expenditures of state owned enterprises as private investment. Pulling together information provided by national organizations, the World Bank and IMF, this publication defines public investment in a consistent manner across all included countries to ensure that data on private investment represent only the capital expenditure decisions of the private sector. }Guy geffermann Direc or, Economics Department & Economic Adviser of the Corporation vii Abstract The first part of the discussion paper examines the role of private investment in economic growth. While theoretical growth models developed in the economics literature make no distinction between private and public components of investment, there is an emerging appreciation that private investment is more efficient and productive than public investment. Results from the recent empirical literature, updated here with the recent data on private investment, suggest that private investment has a stronger association with long run economic growth than public investment. The second part shows trends in private and public fixed investment in fifty developing countries. On average, the ratio of private investment to GDP continued its upward trend reaching record levels in 1998, the most recent year for which comparable data exist. That year average private investment reached 14.3 percent of GDP, but public investment, fell to only 7.0 percent of GDP, its lowest level since 1974. I Chapter I - Private Investment and Economic Growth One of the indisputable stylized facts of economic development has been the wide disparity in economic performance across countries of the world. Over the past 40 years, economic performance of a small number of countries has been remarkable, with per capita GDP increasing fivefold if not more. At the same time, a number of countries have experienced a startling decline in per capita GDP. Attempts to explain these divergent outcomes have generated a voluminous theoretical and empirical literature. A key element in this literature has been the debate over the role of capital accumulation. As summarized in the Annex, the relative importance this literature places on the role of investment in the economic growth process has gone through several phases. Theoretical work of the mid-1950s, for example, suggested that growth in per capita income was ultimately driven by technological progress and was independent of the rate of physical capital accumulation. The more recent endogenous or "new" growth literature has refined our understanding of the sources of economic growth. In addition to expanding the concept of capital to include knowledge, human skills and technology, this literature has emphasized that physical capital itself is not homogeneous. This latter finding has led some researchers to explore in greater detail various definitions of capital. Some researchers have concentrated on the potentially different impact of capital depending on its use, such as manufacturing plant and equipment. A more general distinction, however, is the one between public and private capital. The theoretical growth models developed by the economics literature make no distinction between the private and public components of investment. Given the widely different incentives faced by private and public agents, there is an emerging appreciation (driven largely by the recent work on privatization) that private investment is in general more efficient and productive than public investment. As a result, there has been an increased recognition that private and public investment might have different roles in the growth process. This chapter examines some of the recent findings of this empirical literature, updates some of the results with the recent data on private investment contained in this publication and presents some possible explanations for the results. Chapter 2 presents updated statistics about trends in private and public investment. I Perhaps the best known of these research efforts is the work by De Long and Summers (1991). They argue that countries with the fastest growth rates are those in which plant and equipment investment is the highest. 2 Recent Evidence Information on the breakdown of total investment into its private and public components is not readily available from the standard national account statistics. Where it may be available, the concept of public investment is not always precise. Most standard measures classify capital expenditures of state owned enterprises as private investment. An effort is made in this publication to define public investment in a consistent manner across all countries. In particular, the investment of public enterprises is consolidated with those of general government. This effort is made to ensure that the data on private investment represents only the capital expenditure decisions of the private sector. Using the latest data on private and public investment, a quick examination of the data suggests that private and public investment have different associations with economic growth. Table 1 shows the relationship between private and public investment (as a share of GDP) and growth rates and income levels in the fifty developing countries contained in our investment data set. Table 1. Investment, Growth and Income in Developing Countries Average Annual Growth Rates, 1970-98 Average Annual Share of High Middle Low GDP, 1970-98 (greater than 5% pa) (between 3% and 5%) (Less than 3%) Total Investment 24.6 19.9 18.3 Private Investment 15.0 11.9 9.9 Public Investment 9.5 8.0 8.4 Per Capita Income Levels, 1998* Upper Middle Lower Middle Low ($3,031-$9,360) ($761-$3,030) ($0-$160) Total Investment 21.6 21.4 19.0 Private Investment 14.1 12.8 9.7 Public Investment 7.5 8.6 9.3 Source: World Bank Data. * Income classification is from World Development Report, 1998 Based on average annual growth rates over the period 1970-1998, the 50 countries are divided into three groups - high, middle and low growth countries. Those countries that have, on average, grown faster over this period also have a higher average share of total investment to GDP. Looking at the two components of investment, it is readily apparent that differences in the overall investment ratios are driven largely by the difference in private investment ratios. Further, statistical tests indicate that these differences are statistically significant.2 The average ratio of public investment, on the 2 The hypothesis that there is no difference in the sample means across the various groups is tested using a t-test at the 5% level of significance. 3 other hand, does not vary appreciably across these three groups of countries and, in any case, are not statistically different from one another. Similarly, using the classifications found in the World Development Report, the sample of countries is divided according to 1998 income levels into three groups - upper middle, lower middle and low income countries. As can be seen from the table, higher income countries tend to have higher average private investment ratios than lower income countries. The average ratio of private investment between the three income categories are also significantly different. In contrast, public investment ratios appear to move in the opposite direction. That is, these ratios are higher, though not significantly, in lower income countries than in higher income ones. As shown in Table 2, the differences in investment ratios across growth and income categories are even more pronounced during the period 1990-1998. As can be seen in the various country charts in Appendix 2, during the 1990s private investment was accelerating in many countries around the world as a result of liberalization and market reform efforts, while public investment was declining as a result of privatization efforts and tighter budgetary constraints. Table 2. Investment, Growth and Income in Developing Countries Average Annual Growth Rates, 1990-98 Average Annual Share of High Middle Low GDP, 1990-98 (greater than 5% pa) (between 3% and 5%) (Less than 3%) Total Investment 25.3 19.9 18.0 Private Investment 17.5 12.2 9.2 Public Investment 7.8 7.8 8.7 Per Capita Income Levels, 1998* Upper Middle LowerMiddle Low ($3,031-59,360) ($76 1-53,030) ($O-$760) Total Investment 22.6 22.0 19.4 Private Investment 16.3 14.0 10.3 Public Investment 6.3 8.0 9.1 Source: World Bank Data. * Income classification is from World Development Report, 1998 Existing Empirical Literature While such casual evidence on the relationship between private investment and growth is suggestive, the more appropriate method of empirical research has been cross- section growth regressions. The explosion of recent empirical research has been made feasible by the availability of suitable data sets - due largely to the work of Summers and Heston (1988 and 1991) - that make analysis of growth rates across a large number of countries possible. For its part, this publication was the first to make private and public investment data available on a consistent basis. 4 The typical empirical paper regresses average long run growth rates against a set of variables that is expected to determine those growth rates. Economists have employed a tremendous number of variables in their quests to explain cross-country growth differences. While theory does offer some advice, the choice of variables to include in these regressions has largely been ad hoc, determined to a significant extent by the specification of earlier econometric results in the literature. For the most part, this body of empirical work has concentrated on the role of aggregate investment in economic growth. Levine and Renelt (1992) examined a large number of these studies to determine the robustness of the statistical relationship between growth and a wide array of other variables. They found that total investment is one of the few variables that remains statistically significant (and with a positive impact) across the various growth equations. With the appearance of the first Trends in Private Investment in Developing Countries, published in 1989, researchers have begun to explore the respective roles of private and public investment in the growth process of developing countries using cross- country growth regressions. The volume of studies on this topic, however, is still rather limited. Using relatively small sample sizes and narrower time periods, a number of studies [Khan and Reinhart (1990), Coutinho and Gallo (1991) and Serven and Solimano (1990)] have concluded that private investment has a larger positive impact on growth than public investment. A more recent study by Khan and Kumar (1997) substantially broadened the range of sample countries examined and looked across a relatively long time period. Their results are reported in the first column of Table 3. For the period 1970-1990 both private and public investment have a positive association with growth and are statistically significant. The magnitude of these two types of investment, however, differ considerably with private investment having a much stronger impact than public investment. The estimated coefficient on private investment suggests that a one-percentage point higher average private investment ratio over the 1970-90 periods associated with an increase in the per capita growth rate of four-tenths of a percentage point. The study by Khan and Kumar included data on ninety-five countries, many of which are not found in our data set. As the various editions of this publication have emphasized over the years, it is difficult to obtain private and public investment data that maintains a consistent definition across countries. Since our data strives to maintain that precision, we have re-estimated their regression equation using only the smaller sub- sample of countries that have data in this publication to see if their results still hold. 3 See Temple (1999). 5 Table 3. Determinants of Per Capita Growth Rates Khan & Kumar Restimated Results (1997) 1970-90 1970-90 1970-98 Number of observations 95 41 42 Constant -1.72 -0.16 0.06 (0.83) (0.68) (0.72) Private Investment (Percent of GDP) 0.40 0.56 0.71 (0.09) (0.17) (0.18) Public Investment (Percent of GDP) 0.29 0.15 0.13 (0.09) (0.14) (0.15) Initial per capita GDP (1970) -0.23 -0.27 -0.31 (0.06) (0.07) (0.07) Population Growth -0.79 -0.36 -0.70 (0.39) (0.18) (0.20) Average years of schooling (secondary) 0.02 0.27 0.23 (0.01) 0.12 0.13 Fiscal balance 0.03 (0.01) B? 0.44 0.45 0.61 Using the same time period for comparative purposes, the re-estimated regression equation is shown in the second column of Table 3.4 The results are qualitatively similar - private investment has a greater impact on growth than public investment. In the re- estimated equation, however, the coefficient on private investment is larger and the coefficient on public investment is smaller. The results indicate, for example, that over the 1970 to 1998 period, those countries with a private investment to GDP ratio which was 1% point higher (average, over 1970-98), had a GDP growth rate which was 0.71% point higher. Over the 28 year period, this 0.71% higher growth rate translates into a per capita GDP which is 22% higher than it otherwise would have been. In contrast, if the resources had gone into 1% point higher public investment, the GDP growth rate would have been just 0.13% higher (as a best estimate, but in fact the difference with zero is not statistically significant). A 0.13% higher growth rate accumulates into a per capita GDP which is just 3.7% higher than otherwise after 28 years. The final column in Table 3 expands the time period to include the newer data for the 1990s. Inclusion of the more recent 1990s data results in a further increase in the coefficient on private investment. As with other researchers, such as Ram (1996), Khan and Kumar found that the distinction between private and public investment varied across various sub-periods. During the 1970s, for example, the coefficient on the two types of investment was very similar. The authors suggest that, given the lower public stock of capital during the 1970s, the returns to public investment were higher during that period. It is also likely that the returns to private investment were lower as a result of the more 4Kahn and Kumar include a fiscal variable in their regression equation. These authors note that the inclusion of this variable, along with human capital (proxied by average years of schooling) led to only a slight decline in the coefficient on private investment. Data on fiscal balances was not available for many of the countries in our sample and hence was not included in our regression results. 6 distorted policy environment found in many countries of the world during that time period. Interpreting the Results The results presented here are consistent with the notion that private investment has a stronger role than public investment in long-run economic growth. As the annex attempts to show, however, there remains considerable controversy over the role of capital accumulation in economic growth. The essential question remains whether these results reflect a higher level of efficiency on the part of the private sector or if they capture some other factors not included in the analysis. In particular, is the improved business environment that tends to promote higher private investment itself generating higher economic growth.5 The "new" growth literature tends to highlight the role of knowledge and innovation in the growth process. One conceivable explanation for the stronger role of private investment in the empirical literature is the possibility that private investment tends to embody newer technologies and that it has a newer "vintage" of capital. Public investment, for its part, tends to be in projects that have longer gestation periods, such as infrastructure and basic education. Specific to the work that focuses on the private/public dichotomy, there has also been a debate about whether public investment raises or lowers the efficiency of private investment. Some components of public investment, for example, may be complementary to private investment and, insofar as private investment has a positive impact on growth, would be beneficial to growth. This complementarity is likely to arise in the case of public investment in infrastructure and education. It is generally acknowledged, however, that not all public investment in infrastructure has a beneficial impact on private investment and growth. In the past, many infrastructure projects in developing countries were of dubious quality.6 Further, since public investment utilizes scarce resources - physical and financial - or produces output that competes directly with the private sector, it can also "crowd out" private investment. An increase in public investment in these circumstances may have adverse consequences for private investment and growth. It his much cited work, Aschauer (1989) found that for industrial countries public sector investment in infrastructure has had a very strong positive effect on private sector productivity. Focusing on developing countries, a recent study by Odedokun (1997) finds that public investment in infrastructure facilitates private investment and growth whereas non-infrastructural public investment does the reverse. With liberalization, increased globalization and the changing nature of the regulatory environment in developing countries, it is no longer the case that that only the public sector undertakes infrastructure investments. In many countries, such investment is now being done by the private sector. IFC has helped finance many private investments in roads, ports, 5 One of the frequently cited concerns about the empirical growth literature is the probable endogeneity of some regressors. Do our results suggest that investment causes growth, that growth causes investment or that some other variable causes both? 6 See Krueger and Orsmond (1990). 7 telecommunications, and electricity generation and transmission. As the work on privatization suggests, the competitive business environment of most market economies subjects private investors to very different incentives than those of the public sector. Last year's Trends in Private Investment (Pfeffermann, Kisunko and Sumlinski (1999)) showed there is a link between private investment and the various obstacles to doing business encountered in developing countries (i.e., unpredictability of the judiciary, tax and labor regulations, etc.). Not surprisingly, those countries in which these obstacles were less onerous had higher levels of private investment. That a better business environment leads to higher private investment relative to public investment could be among the factors explaining the empirical results cited above. Clearly, more work is needed linking the analysis of the business environment with that of the growth literature. In addition, one can hypothesize that a more favorable and competitive business environment will lead firms to invest in new technologies, ideas and innovations that allows them to retain their competitive edge. 7 It has long been understood and accepted that "vicious" forces of competition brought on by a dynamic private sector improve the allocative efficiency of a market economy - resources are channeled to those sectors/industries/firms that can use them in the most productive manner. The endogenous growth literature suggests that there is a relationship between investment in innovation and knowledge, technological progress and economic growth. Finally, the level of private investment in an economy can be viewed as a proxy for a dynamic private sector and hence for the extent of technology progress in an economy. In a competitive environment, a higher level of private investment, therefore, not only represents the increased accumulation of physical capital, it also represents the replacement of old inferior technologies with newer more efficient technologies - not just more capital but a newer "vintage" of capital. Insofar as private investment embodies newer technology, it captures two things: capital accumulation and the effects of technological progress. Technological innovation increases the productivity of capital and hence alters an economy's underlying long run growth rate. 7The public sector, on the other hand, doesn't often face these competitive pressures and hence doesn't need to continuously update its capital stock. 8 ANNEX: EXPLAINING ECONOMIC GROWTH Our understanding of economic growth has been shaped to a large extent by key works in the literature. Each of these works has brought about a new phase in the theoretical understanding of economic growth. As is usually the case, it takes some additional time for economic practitioners to digest the implications of these advances. A. Harrod-Domar Economists have been trying to explain the sources of economic growth since the days of Adam Smith. It wasn't, however, until the work of Harrod (1939 and 1948) and Domar (1947) that the economics profession began to formalize its understanding of economic growth. The work of Harrod-Domar summarized the essence of almost 200 years of theorizing about economic growth. 8 At the heart of this view of economic growth is the very intuitive notion that the steady accumulation of physical capital through saving and investment translates directly into higher levels of production. Termed capital "fundamentalism" for the central role played by investment, this view of economic growth was widely held by economic practitioners for most of the 1950s and 1960s. Under this framework, the level of output is directly related to the size of the capital stock. If a firm, or more broadly, an economy, wants to produce more output, it . . . ~~~needs to acquire more capital. The amount of Figure 1. Impact of an increase in investment share of GDP in the Harrod-Domar capital relative to the level of output, the framework. capital-output ratio, can be viewed in this simple framework as a measure of the rate efficiency of capital. Since the historical evidence of the time suggested that this ratio Long Run Growxth Path was relatively constant, it was assumed in .nitial long this framework that the capital-output ratio is Initial long run growth rate fixed. Thus, for any initial level of capital and any given capital-output ratio, the rate of growth of the capital stock (investment) is the i_____________________ crucial determinant of the rate of output T- change in Time growth. For example, with a capital-output investment rate ratio of 4 and a net investment rate (after depreciation) of 8 percent of GDP, the economy would grow at 3.2 percent (4 x 0.08) per annum. If the net investment rate is somehow increased to 10 percent of GDP, growth in the economy will accelerate to 4.0 percent (4 x 0.10) per annum. With this framework in hand, economic practitioners focused on the policy question of how to raise the level of investment in developing countries to bring them closer to the 8 See Easterly (1999) for a fuller discussion of Harrod-Domar's place in the growth literature. 9 stage of development achieved by industrial countries. Since these countries were considered too poor to finance the level of investment required for high growth rates themselves, it was felt that positive per capita growth would only materialize if western donors filled the "financing gap" with foreign aid. The famous "two gap" model of Hollis Chenery (1966) became the standard model in the World Bank when Chenery became its Chief Economist (although, as applied by the World Bank, only one gap was utilized in the analysis). The principal use of this model has been to determine the financing needs of member countries in order for them to achieve a target growth rate (the desired growth rate times the capital output ratio give the investment requirement). Measuring the capital-output ratio became a most important exercise because its value dictated the size of the effect of the rate of investment on economic growth. The faster economic growth brought on by this larger investment effort would allow the standard of living of the developing world to converge with that of the industrialized world. 9 Even while the Harrod-Domar model was g- 2 -tnt d GDP - 19703199gaining popularity arnong economic practitioners as an elegant formalization of growth theory, it was coming under attack. From a theoretical point of i-no *' . ; view, the model did not leave much room for other factors of production, such as labor. Under the assumption that developing countries had surplus labor (unemployment), the model focused on the ID DI DI ] , ~ assumed scarce resource in these countries, physical capital. The simple relationship between capital and growth breaks down, however, when output growth is constrained by the availability of labor (called, not surprisingly, the Harrod-Domar inconsistency condition). Many economists found the ad hoc assumption that the capital/output ratio was exogenous (i.e. determined outside the model) and constant equally troubling. On empirical grounds, as larger and more diverse data sets became available, the simple linear relationship between investment and growth proved to have very limited justification. 10 9 The most influential textbook on economics by Paul Samuelson featured a diagram extrapolating Soviet and American growth into the future. Given its level of investment, it was surmised that GNP in the Soviet Union was quite capable of overtaking that of the United States by the year 2005. Similar comparisons were made for North and South Korea. It is clear now that centrally planned investments of these countries did not result in the build-up of productive capital. 10 See King and Levine (1994), Easterly (1999), and Easterly and Levine (2000) for summaries of this empirical work. l0 B. Solow and the Neoclassical Growth Model While many economic practitioners continued to employ the Harrod-Domar framework, a famous article by Solow (1956) led growth theoreticians to abandon this framework in favor of what has been called the neoclassical growth model. This model has served as the central building block for the very large subsequent theoretical and empirical literature on economic growth. Solow's work ushered in a new phase of the growth literature and introduced a different perspective on the role of investment in growth. Rather than assuming a constant capital/output ratio, as did Harrod-Domar, Solow assumed that it was determined endogenously (i.e., resulting from the internal conditions of the model). Solow's model featured a production function that allowed for smooth substitution between the various factor inputs. The production function he postulated had a long tradition in economics - output is produced by combining capital and labor under constant returns to scale (doubling both inputs will double output)'1. Equally comforting to economists, the model postulated that the equilibrium between supply and demand is determined by competitive markets. Competition will insure that factors of production will be employed up to the point that the additional value of output produced by a factor is equal to its market price (i.e., the wage rate or rental rate of capital). Importantly, each factor of production is assumed to exhibit diminishing marginal productivity - as more and more of an input is added (all else constant), it produces less and less additional units of output. Most interest in this model centers on its long run or steady state (the path where every variable grows at the same rate) implications. The model's internal adjustment mechanism keeps the stock of capital (measure always relative to labor) at, or at least moving towards, it's long-run equilibrium value. If the ratio of capital to labor is either too small or too large relative to its competitive equilibrium value, this disequilibrium will set in motion an adjustment mechanism. For example, if for some reason the capital/labor ratio is smaller than its implied equilibrium value, this indicates that profitable gains in output can be achieved by investing in more capital. The assumption of diminishing returns implies that further investment in capital will yield smaller and smaller gains in output and at some point these gains cease altogether. Conversely, if the capital/labor ratio is too large, then the marginal return on capital is negative and a reduction in capital relative to labor is warranted. Under Solow's framework, the adjustment mechanism implies that the long run (steady state) stock of capital per worker is constant - that is, the capital stock grows at the same rate as labor force. Since the growth in the labor force is assumed to be an exogenous demographic phenomenon, it follows that economic growth in the long run is also exogenous. While total output is growing (at the same rate as labor " It also assumed constant, and unit, elasticities of substitution so that the shares of capital and labor in total income were constant. I1 force/population) in the long run equilibrium, there can be no growth in per capita output! Solow's initial growth model, therefore, failed to predict a very important stylized fact: most economies tend to exhibit sustained growth in per capita income over the long run. In order to address this shortcoming, Solow (1957) introduced the notion of technical progress to the model. An important assumption of this "augmented" growth model is that technological progress is exogenous. As it is commonly described, technology is like "manna from heaven", it descends upon the economy automatically and irrespective of what else is going on in the economy (relaxing this assumption is one of the major efforts of the "new" growth theory discussed below). While the introduction of technological change allowed Solow's growth model to display the important property of sustained per capita growth, such growth remained exogenously determined. In the long run, capital and output grow at the same rate as the labor force and the rate of technological progress (Growth in per capita income will depend uniquely on technological growth). What role does investment play in this model? Some positive level of investment, of course, is needed to replace capital as it depreciates and to maintain the size of the capital stock constant relative to the labor force. Countries with higher levels of investment and therefore higher level of capital per worker will, as can been seen from the use of the production function, have higher levels of per capita output. A conclusion from this model, therefore, is that countries are rich because they have a lot of capital. Having a lot of capital, however, doesn't mean that these countries will grow any faster in the long run. As population and technological progress are assumed to be beyond the influence of economic factors, long run economic growth in this framework can be seen as immune to economic policy, good or bad. The basic proposition in Solow's growth model, that a steady-state growth rate is independent of the investment rate, still comes as a surprise to most economists. In his second article, Solow performed a simple accounting exercise (known as growth accounting) to explain output growth in terms of growth in capital, growth in labor and growth in technological progress. What can't be explained by growth in factor inputs (labor and capital) is captured by technology, commonly referred to as total factor productivity growth. Because of the way it is calculated, as a residual, and because it represents that portion of growth that could not be explained by factor inputs, many economists have referred to it as a "measure of our ignorance". Solow and subsequent researchers found that most economic growth of the United States is explained by technical progress with capital accumulation playing a much more limited role. These early estimates, quickly extended to other industrialized countries, found that total factor productivity accounted for more than half of growth while capital accumulation accounted for only one-eighth to one-fourth of growth. 12 The slowdown in economic growth that occurred in the United States and other advanced industrial countries in the late 1 960s and 1 970s generated a tremendous amount of empirical work using this growth accounting framework. The bulk of the slowdown, it was discovered, was due to a decline in total factor productivity (and not from a diminution of investment efforts). Considerable research effort was expended trying to understand why productivity declined. Explanations ranged from the effects of oil price shocks, the shift towards a service economy, increased regulation of the economy and a slowdown in research and development efforts. Some economists also questioned the meaningfulness of capital stock measurements. They argued that since portions of the capital stock had, as a result of changes in relative prices and government regulation, become obsolete, growth accounting would give a misleading estimate of the impact of technological progress on growth. By looking for explanations based on changes in technological progress, these research efforts presaged much of the endogenous growth literature by more than a decade. With the increased availability of comparable data, growth accounting has been extended to a range of developing countries. Among the better-known applications is Alwyn Young's (1995) use of this framework to explain economic growth in East Asian "miracle" economies. Using standard measures of output, his much-debated work showed that the rapid growth of these Asian economies stemmed primarily from rapid factor accumulation. Work by Klenow and Rodriguez-Clare (1997), among others, however, disputes Young's finding and shows that in none of East Asian countries does factor accumulation play a dominant role in accounting for their growth. They find that most of East Asian growth is explained by that great unknown - total factor productivity. The disparity in results stems from the fact that the latter two authors utilized a measure of growth in terms of output per worker. They also use an "adjusted" measure of total factor productivity to account for the impact of capital growth (i.e., adjusting for new vintages of capital) on total factor productivity itself. Their conclusion is that the performance of East Asian economies is consistent with technological accumulation (or a "catch-up" by those countries that began with a lower stock of technology) and not with factor accumulation. While one could rely on differences in Figure 3. Impact of an increase in investment technological accumulation to explain in the Solow framework (with "transition divergent growth patterns, a more subtle dynamics") Growth explanation appeals to "transition dynamics" rate (see Figure 3). As noted earlier, in the long run the Solow model predicts that per capita growth will be determined solely by Long__ lnotPh technological change. In the short run, Long Run Gm Path however, it is quite possible that countries can be off their "long-run growth paths". Recovery from wars and other economic T- change in Time shocks, for example, could lead to stages of iinvestment rate rapid capital accumulation and economic growth. Under such circumstances, the Solow 13 model suggests that countries will be able to realize positive growth rate gains from investment in physical capital and always gain in absolute output. Assuming that these growth paths are not stochastic (ever changing), however, the diminishing returns to capital implies that growth rate gains will decline and eventually disappear altogether once an economy reaches long run equilibrium. Under this hypothesis, growth of "miracle" Asian economies was associated with a boom period that could not be sustained. C. Endogenous growth By the 1980s, economists became increasingly frustrated over the inability of the neoclassical growth model to address adequately some burning questions about economic growth. The model had little to say on why, for example, if economic growth is exogenous, depending solely on technological change, per capita growth performnance of countries is so radically and persistently different over long periods? Can the rate of technological progress differ so greatly across countries? More fundamentally, however, there was great dissatisfaction with the assumption that long run growth rates are determined outside the model and independently of savings/investment preferences and, most importantly, policy behavior. At the end of the day, the Solow model explains the mystery of economic growth simply by assuming that there are exogenous factors, such as population growth, that determine growth. Increasingly it was felt that the pace of technological progress, the determinant of economic growth in the neoclassical framework, must have some economic explanations. Towards the end of the 1980s, this dissatisfaction gave rise to a body of literature, due largely to the work of Romer (1986, 1987), that is commonly known as the "new" growth or endogenous growth literature.12 The term endogenous growth, like so much else in the economics literature, is a misnomer. All other models of growth also consider growth to be endogenous. What is different in this "new" literature, however, is that technological progress is also considered endogenous. This literature recognized that innovations or technological progress do not fall like manna from heaven but instead are created by profit-seeking human beings subject to a variety of constraints and policy incentives. Several different modeling approaches have been applied by this "new" approach, each sharing the central conceptual issue - the extent to which technological progress, and ultimately economic growth, is endogenous. While different strands of this literature use different mechanisms to sustain growth, they all introduce some type of capital whose accumulation is not subject to the assumption of diminishing returns. One strand broadens the definition of capital to include human capital accumulation (Lucas (1988), Rebelo (1991) and Stokey (1991)). Another strand incorporates the accumulation of 12 An article by Nelson (1997) suggests that most of the basic premises of the "new" growth theory were well known more than a generation ago. '4 knowledge, either through learning by doing (Romer (1986)) or through R&D (Romer (1990), Grossman and Helphman (1991), and Aghion and Howitt (1992)). Rather than model this broader view of technology as just another input to the production function, the endogenous growth literature recognizes that ideas, knowledge or innovations are different from other inputs. Once invented, the knowledge embodied in new ideas or innovations becomes a "public good" available to all. Unlike physical inputs, however, knowledge is nonrivalrous, meaning that it can't be used up. Indeed, investments in new knowledge (including formal schooling) by any one agent will spillover and benefit everyone in the economy (they have externalities). Another way of putting this is that the development of new ideas requires a fixed cost of production but once produced their use has zero marginal cost. If the benefits of new ideas can't be captured by the inventor, however, there is little reason to believe that innovation will take place. To encourage innovation and the development and introduction of new ideas, firms need an environment that limits business uncertainty and offers the appropriate incentives to adopt or implement technological changes.'3 Hostility to innovation and investment can show in a variety of ways. For example, Parente and Prescott (1999) show that established factor suppliers who are earning monopoly rents with old technology (protected via government regulation) can inhibit entry by firms wanting to use better and newer technologies. Given the nonrivalrous nature of new ideas and knowledge, societies have adopted institutions, such as copyrights and patents, that grant the inventor the exclusive use or the right to charge for their new ideas. A number of economic historians, such as Douglas North, have postulated that the development of property rights is responsible for modern economic growth. Indeed, the industrial revolution - the beginning of the first sustained economic growth in world history - only occurred once the institutions to protect intellectual property were sufficiently well developed. The introduction of the "economics of ideas" leads one to abandon some important assumptions of the neoclassical model. The spillover effect of new ideas and the institutions put in place to encourage them leads one to contemplate the presence of increasing returns to scale (i.e. doubling all inputs more than doubles the output) and imperfect competition.'4 Recent work in the endogenous growth literature has offered more explicit descriptions of how, for example, investment in R&D and the externalities inherent in the accumulation of knowledge leads to economic growth. These efforts generally start with a more microeconomic understanding of the decisions behind the research and development process and end up by melding the theory of monopolistic competition to the theory of economic growth. 13 Brunetti and Weder (1997) argue that the irreversibility of investment magnifies the effect of uncertainty on investment decisions. They present an analysis of the effect of 24 uncertainty variables on investment in a set of 60 countries. They find that various measures of uncertainty are important in explaining cross- country differences in aggregate investment rates. (See www.ifc.org/economics/pubs/techpap4'tp4.pdf) 14 In these models the production function exhibits constant returns to scale with respect to the capital and labor input, but increasing returns to scale with respect to all three inputs. Doubling labor, capital and the stock of knowledge will more than double output. 15 This literature demonstrates that simple changes to the production function or the definition of capital (to include, for example, "human" capital or knowledge) can dramatically alter the predictions about the relationship between investment and economic growth. By assuming, for example, that the accumulation of knowledge has spillover effects or results in learning by doing, then investment in capital (broadly defined) can itself result in new technology and knowledge. 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Temple, Jonathan, "The New Growth Evidence", Journal of Economic Literature, Vol. XXXVI, pp. 112-156, March 1999. 20 Vanhoudt, Patrick, "The Issue of Public vs. Private Investment in Physical Capital and Knowledge: What is the Relevance for Economic Growth?", Tijdschrift voor Economie en Management, Vol. XLII, No. 1. Vanhoudt, Patrick, "A Fallacy in Causality Research on Growth and Capital Accumulation", Economics Letters, Vol. 60, pp. 77-81, 1998 Young, Alwyn, "Tyranny of numbers: confronting the statistical realities of the East Asian growth experience", Quarterly Journal Of Economics, Vol. 110, pp. 641-80, August 1995 21 Chapter 2 - Private and Public Investment Trends In 1998, the latest year for which national accounts data exist, private investment in the fifty countries included in the data set, continued to rise on average and public investment to decline. Although the increase in private investment was small, it occurred despite worsened economic conditions in many developing countries.15 The ratio of average private investment to GDP increased slightly to 14.3 percent from 14.1 percent in 1997 (see Figure 1). Public investment, on the other hand, fell more sharply as a ratio to GDP, from 7.5 percent in 1997 to 7.0 percent in the most recent year. Fig. 1. Trends in Private and Public Investment (percent of GDP) -*- Private investment -Public investment 16 14 a.12 o 10 06 2 1970 1974 1978 1982 1986 1990 1994 1998 Regional trends mirrored the overall figures, as shown in Figures 2 through 5. Most notably, Latin America has experienced a significant up swing in private investment in the latest three years, while investment in East Asia, affected by a deep financial crisis, continued to decline in 1998. South Asia and Africa, both with generally increasing trends in private investment, have seen public investment falling. Latin America was the regional leader in private investment growth (See Figure 2), but the ratio of public investment to GDP continued as the lowest among major regions. Private investment reached 16.2 percent of GDP in 1998, exceeding public investment by a factor of three. Private investment increased in all major countries of Latin America, but Belize, Colombia, Peru and Uruguay followed flat or declining trends. 15Investrnent refers to gross domestic fixed investment, encompassing both national and foreign direct investment. 22 Fig. 2. Latin America: Private and Public Investment (percent of GDP) -Private Investment -Public Investment 20 1 5 Io R 10 5 0 _ 1970 1974 1978 1982 1986 1990 1994 1998 In Sub-Saharan Africa (Fig. 3.) in 1998 private investment increased for the third year in a row and reached a ratio of 10.5 percent of GDP. Private investment increased in Cote d'Ivoire, Cape Verde, Gambia, Chad and Mauritania. The remaining African countries covered in the data set recorded declines in private investment to GDP ratios. Sub-Saharan Africa had the second highest (next to East Asia) public investment to GDP ratio among the regions in 1998. Nevertheless, for the second year in the row, private investment exceeded average public investment for the region. Fig. 3. Sub-Saharan Africa: Private and Public Investment (percent of GDP) -0-Private Investment -Public Investment 1 6 14 12 o 0 a 0 6 2 1970 1974 1978 1982 1986 1990 1994 1998 Private investment in South Asia (Fig. 4) fell as a proportion of GDP in 1998, but only slightly. Except for this blip private investment's importance in South Asia has been increasing for 25 years. Private investment increased in Bangladesh, but declined in India, and remained nearly flat in Pakistan. Public investment followed a declining trend as well, and remained at a level of about half of private investment. 23 Fig. 4. South Asia: Private and Public Investment (percent of GDP) -e-Private Investment -Public Investment 16 14 12 o 10 4 2 1970 1974 1978 1982 1986 1990 1994 1998 East Asia's average private investment ratio declined in 1998 for the second year in a row to a level last recorded in 1989. Not surprisingly the most pronounced declines in private investment were registered in the crisis countries: Indonesia, Korea, Malaysia, Thailand and Philippines. Private investment declined as well in Cambodia, remained flat in China (though at a high level) and increased in Papua New Guinea. Public investment increased only slightly. East Asia has the highest level of public investment to GDP among the regions, exceeding the global average by 1.5 percentage points. Fig: 5. East Asia: Private and Public Investment (percent of GDP) -o- Private Investment -Public Investment 30 25 20 15 5 1970 1974 1978 1982 1986 1990 1994 1998 Individual country trends as well as the statistics are shown in Appendix 2. 24 The following table shows 1998 private investment ratios in descending order. Cape Verde 26.3 Egypt 13.1 Papua New Guinea 23.3 El Salvador 12.8 Korea 22.7 Bolivia 12.5 Malaysia 21.4 Belize 12.5 Turkey 20.3 Cambodia 11.5 Mexico 19.8 Benin 10 .7 Argentina 18.2 Colombia 9.7 _~~ . Indonesia 18.1 Chad 9.0 Z0.7 .3.rgMM .w WiRa China 16.4 tlruguay 8.6 Morocco 15.9 Mauritania 7.3 __0 Z0>$ t3 ~i§ 0A5. ' .' Bangladesh 15.1 Romania 5.8 Paraguay 14.2 Guinea-Bissau 5.2 i" Orl_S£N 25 Appendix 1: Methods and Sources 1. Fixed Investment Data National accounts normally do not break down gross domestic investment into its private and public sector components. Private investment is defined in this publication as the difference between total gross domestic investment (from national accounts) and consolidated public investment. Consolidated public investment data for each country were compiled mainly from World Bank Country Economic Memoranda, Public Investment Reviews, Public Expenditure Reviews, and other World Bank country reports. They reflect efforts by World Bank missions to compile public sector data. Where World Bank data are not available, country data were used. The countries included in this edition represent all the developing countries for which the relevant data are available. Minor changes were made in the last two or three years for most countries as a result of revisions in their national accounts data. Updates are not available (at the time of this writing) through 1997 for the Republic of Korea. Table 1 in presents investment figures for each country, including total fixed investment (GDFI/GDP); private fixed investment (PRIVATE I/GDP); and public fixed investment (Public I/GDP). The ratios are computed using local currency units at current prices. 27 Appendix 2 - Country Charts 29 Sub - Saharan Africa Benin Cape Verde Chad Cote d'lvoire Gambia Guinea-Bissau Kenya Madagascar Malawi Mauritania Mauritius Namibia Soutlh Africa 30 Benin tZfte d' Ivoire 35 35= 0() ........ ... ... 30. . 25 - 25 25. * . ........ ....... Is..X 7], . .. 1 0 . . . ... ...... . .............. 20 ..~~~~~~~~~~~~~~~~~~~. .. '................_.i _ 1930 1951 9'W 193 1 1955 1995 1996 1997 195 I')% 1997 MS7 1999 193 19X 7 1992 ' 194 1Q55 ['56 !1'? ], Cape Verde Gambia 30 25. 23 O 0 55' I'M 199 1955 19)1 1992 199.3 1956 1996 556 19197 19% 1997 I99 11~9 195 ) 1993 .1~ >55, R 14A 1427 '30, ['4 '61) Chad Guinea-Bissau 30 20~~~~~~~~~~~~~~~~~~~~~~~~~I 1 . - 3i 2 ,,,,, ,,,.t,, 15. 10 19311 i4~ 19% 1997 199 1987 19 19 '933 1991 21 199 IM 1VW6I-R,' 10 '4" 9S651 5661 K.61 D%t 065 E961 9S61 tfiI Z%I 061 %lal61 E(61 161 &(l S6( E16t 0 ol 01 01 .................... ..... , . -----Is , , f;,,,,,,/ ,,,,............ CZS .......................................... .......... Cc .....................................................' ,i.. dEDt/estl:Bt4io g L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&P'., -1wi 1WU .1 L~0 0 ... .. .. . ~~~~~~~~-==- -iS ......................... ...... - .- -:- ---::-- ----- .......... - SE u*/otu/. 61 S661 K6i 1 0561 SS 9I j bS1 0961 Slb1 9061 6 1 9 0 1 Z6 l 0061 6 t6 1 6 6 1061 1661 _ 0 61 01951 ,0' .... .... .. .;. ; ... . s t '''''''''''''''''''''' ''''' '''''''7g- --- ---- 0sl ........0 . . .......... . . . . .... .....--------- :-- SE . 7Pz u sn!lJneW~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~11 ...sSee --- I O -Fw -d - - - --- - CI ,A, . - - f nl C\/\\\ e t ;1 0o -_ -S ---- ----- --- ----- ---------- ''''''5 0 ~~~~~~~~~~~~~~~~~~~~~~~00 00 00 I >,,,,ual.v3vNo N d¢)v4,SI Si ...... ....... ...... ... : ...: :51 .. .............. .... , CZ1 . .:. S ... ,. p 1S~~~~~~~~~~~~~~~~~~~~~~~0 da)j~~~, q ~,~U SE .. .. dfluu '9nu1 32 South Africa 35 I G- p 5 . ..... . 1970 1973 1976 1979 1982 1985 IYSS 1991 1994 1997 33 Latin America and the Caribbean Argentina Belize Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela 34 Argentina Brazil 35 -3t m h0 ...... 30 -c -D.- -- Rli.c hr. %.fGDl 30 25 .--Ri ................. ................. I Z. ........... FP 25 25. 20 0~~~~~~~~~~~~~~~~~~~~~~~~~~~I -- _ _ _ _ ...-.----- sK~~~25 ....... ... . 1970 1974 ['173 1912 1%6 195O 1933 19i8 0 1970 [974 1478 [9 112 9106 193) 136 1 94 Belize Chile 35 R - - ; : - - - 35 30 ...... VblcIns:'x,f - - - - -- - X 30 ) McImf ' '' --- 1 .. ... . .., ...., 5 .. 25 25. 20 2 1972 1914 1976 19)7!3 I'M80 12 [9934 198.5 1988 1990 9 1992 N4 M6 1998 1970 192T 1976 1979 1912 195 1916 1991 [914 1470 Bolivia Colombia 35 . - -X- -- --- ~ ~ ~ :3 - ft := /.C . . 'ii lm%ef3 30 5 30 R-krk %r.f(l --Rl :%fl ...o....199.. In91C1 25,0.., ; 25,.. . . . 20, .. .... ... .. ..... .. ....~~~~~~~~~~2 5 ~~~~~~~~~~~~~~~~~3 .... ....... 20 15~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 IO 5,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ (4 - . .. . .. . . O _ 1970 1974 [978 1982 1986 M9O 1994 I[1 1 *9 1988 [989 1995 [911 [92 I'M1 1-94 [995 1996 I%)7 1918 __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 35 Costa Rica El Salvador 54~~~~~~~~~~~~~~~~~~~~~~~~3 30 ftik . % CT3 . I-1..tu 21 2 . ...-.-.. .... -. _ 0, ...... .... .. ......................~~~~~~~~~~~~~~~~~~~~~~~~~..........20 97311 1974 1975 M4 1545 1990 19 'PA 1971in 1974 19751 15431 14 NM3 3954 55 Dominican Republic Guatemala 35 . . . . . 35 | h 3. 305. r ... ....... .. ... ..... 20~ .dil .9~I /~f 25 ~~~~~~~25. 15s 15- 32, .... . ..... 10 5,1 /. .... \ ... .-/' ''-': ~~~~~~~~~~~~~~~~~~.. ...... 5 _ -';.......... ..... ..... . ' 9330 3974 '7 12 546 39% 3 54 1958 1970 1974 1938 1943 1946 13 1544 I3918 Ecuador Nicaragua 33,~~~~~~~~~~~~~~~~~~~~~~~3 35 __ . . ... . .... R.1h '4faP 35 30 25 2 5 ... .. . .......................... 25~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ... . .... ..... ,0 . S -; 20I - - - -- -- - / -- (S _-------- __ _______ 5 ____ '433) '473 176 '413 I9 1985 3'S 3943 1994 1957 O . - 1993 1941 19)2 1933 544 1935 1Q% 1947 13893 36 Mexico Peru R55 35 -30 .....30 25 25. ';20 '-- f..D1 ----........... .. . 1a 15 10 ~~~~10. . X t /~~ . . ~ . _ _ _ _ - . . . 0 - . , _ _ _ _ _. . ..-1....... . . . . . . . 7. : . . ... I25 I4 19 9 5 191 191 1 92 19399431919 981 1934 1917 1X5 1933 9 Panama Uruguay 30 305.I, j-Ri 7 'dP25 . . ...... .. 25 .. ..... ... . 30.. 30 . : 5 2 5 -- . . ..... . . . . . . . ..... , 15. !5 S . / 15 ..... ......... .. ,. ; X, ' ,,, ; ~~~~........... ..... _.,,. ... . -E .- - _ _ __ . - __ _0- '985 I, 1937 1 S V 195 1991 19'7 1993 1934 193 196 19397 1 170 1974 1938 19931 1963 1930 914 1993 Paraguay V enezuela '9 35-- -- --- - - 35- -- -- - - * 910z/,30Ci-.D 25. 5 ~~~~~~~~~~~5 ... 157,3 93 1974 9I 19312 1936 1933 196 1916 195 1933 1956 1937 951999 195 I931 19521 91 1934 19-51 19% 19379916 37 Middle East, and North Africa Egypt Iran Morocco Tunisia Turkey 38 Egypt Tunisia 35 IS- % 10 so RH~ 1~~ ?Ikf - 3-0 -- __ __L,_ -- 1) 'DP I0: 10514 1( 18 090 12 199 1 9 10 197 1Ž 4 1970 1 90 eS1 ' A Iran Turkey 35 35 30 30 - P-dA.I. 97f' -.0CiDP 2I: -- - .X............. 20 - 58 5--.-- ......... . o-. - _ ._ ___ _____----- _--- _ - ''.4J i1%4 1953 19)02 19S 1910 1c974 1978 1942 I0b 14): 1Ž10 -' Morocco 15 -- .... - E .......... . _ .... . . 35 no, ~~~~~~~.. ... ...... . .......... 2'5 - - 15 .- . 1 - .. . .. '175 15,7:3 1901 1901 1907 1407 1c90 1905 39 Transition Countries Bulgaria Poland Romania S361 /661 %61 5661 1061 £651 £651 1661 - 01 ....'. .. .. .. .. : .-.-.:;. '0 .............. .............. .. .................. .... -- % ;~~~~~~~~~~~~. . . . . . . . . . . . ' '.'. '.'. o z 0£ & % -M, -ld - - .. .............. ,o 8 651 9 66 1 £651 1661 561 0 .... .. ......... ...... 7=........ 5 o. dOW" % 0O .......... ..........~ ~ ~ ~ 0 ot, 41 East Asia Cambodia China Indonesia Korea Malaysia Papua New Guinea Philippines Thailand 42 Cambodia Republic of Korea 35 35. iXbilc Tn.: <> .,-dT ~~~~~~~~~~ ~~30 - W 25. 25 /\ 21. < O ' . - - - 0 1513>3 ~ ~~~~~~~~ ~ i9S0 1_ 19_ 19_5 159 I971 1974 1977 10 ii3 198 1979 1%2 i95 19P China Malaysia 97 ~~~~~~~~~~~~~~~~~~~~~~~~35 PniEvalms,e EE Eiinv/ 3(, . 30 . ......... .......... S ~~~~~~~~~~~~~~~~~~~~~~~~~~~---Pbiica.of . I5. --licr'/.f(EPXX 25 2 25~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2 ) ..... D....... ...2_ .. ... . | O f . .-_ - J .......... .... lo ;,_, . ... . ............. ............ :. ,! ....~~~~~..... ..... .. . 10 1930 1792 1974 1'. I73 19O0 19D2 1974 1996 19_3 1970 1974 1979 1952 1292 1990 19S4 192 Indonesia Papua New Guinea 30 30.. Ri 1 W '/ 1CUP 2D~~~~5 15 ....15 ~~~~~~~~~~~~~~~~~........... 0 0 1971 i976 1991 192 1971 1974 1977 19112 19731 lOX 43 Philippines 35, 70 ..I±ien 51h" 'd11 .............. 125 o L 20 1975 1977 1979 1981 19X 1I5 1997 1999 1991 1993 1995 197 Thailand 3970 1Q73 19 a 19 19 19 1 20 ; r t/ ~~~~~~~~~~~~~.... ... ....-.......... 10~~~~~~~~~~~~~. ..... .-...... _ 5''.,:.... .....'.__" 1970 ' 197 I76 197 1 9 195 198 1991 1931 199 45 South Asia Bangladesh India Pakistan 46 Bangladesh 30 15 3,5 1 c0 .. . .. 25,:: ..::.... 20 0 170 19774 l'43 192 11 I- Pakistain 35 .-° -- 30 * Ldi,cI .d(.lIF 2D 25 3D- 0 - I9A 70 lf774 19)73 1'B2- 1'(986 1}1 Table 1. investment as a share of G8DP (in %) Country/Year ~~~~~~~~1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Argentina GDIIGDP 21 2 20.9 203 18.2 19 3 25.9 26.8 27 2 24.4 22 7 25.3 22.7 21.8 20 9 20.0 17.6 17.5 19.6 18 6 15.5 14.0 14.6 16.7 18.2 19.9 17.9 18 I 19.4 1 99 Private IiGDP 13.1 12.8 12.5 11 6 12 5 16.1 15.1 15.0 13.4 14 1 19 2 16.9 16 6 14.8 14.9 12.5 13.2 15.7 14.4 12.2 9.4 12.7 14.9 16.6 18.1 16.4 16.8 17 9 18 2 Public 1/GDP 8.1 8.1 8.2 6.6 6.8 9 8 11 7 12.2 11.0 8.6 6.1 5 8 5 2 6.1 5 0 5.1 4.3 3.9 4 3 3.3 4.6 1 9 1.8 1.7 1.8 1.5 1.3 1.4 1.7 Bangladesh GDIIGDP 3.0 7 1 6.3 9.9 11.1 11 8 11 3 15.3 23.5 22 6 19.7 18 1 19 I 18.5 19.0 18.4 19.1 18.9 18.7 18.8 18.9 19 0 20.0 20.8 21 6 22 2 PrivatelI/GDP 2.9 4.2 3.4 5 4 4.9 5.6 5.7 8.2 13 6 12 4 10.0 9.6 12.7 1 1.4 11.4 11.5 11.7 11.6 12.0 11.8 12.4 12.3 13.2 14.4 14.5 15.1 Public I/GDP 0.1 2.9 2.9 4.6 6 2 6.2 5 6 7.1 9.9 10 2 9.8 8 4 6.4 7.2 7.7 6.9 7.3 7.3 6.7 7.0 6.5 6.7 6 8 6.4 7 1 7.1 Belize GDFI/GDP 26.2 23.5 27.1 25.3 28.7 28 0 28.5 26.6 22.7 24.8 22 5 18.9 20.3 17.4 17.4 21.5 25 7 27.4 25 6 28 5 29.3 29.8 24.1 20.6 18 5 23.3 23.9 Private I/GDP 17.8 15.2 14.8 16.6 18.5 16 1 11.7 9 8 11 1 13 5 9.8 8.5 11 8 8.7 8.4 13 8 17.1 17.4 11.4 8.1 10 0 16.3 13.0 12 7 12.0 12.8 12.5 PubliclI/GDP 8.4 8 3 12.3 8 7 10 2 11.9 16.8 16.8 11.5 11 3 12.7 10.4 8.6 8.7 9.0 7 7 8.6 10.0 14.2 20.4 19.3 13.5 11.1 7.9 6.5 105 11 4 Benin GDFI/GDP 13.4 13.6 13.2 15.0 15.5 17.2 16.6 18 5 16.2 Private PGDP ~~~~ ~~~~~~~~ ~~~~~~~~~~~~~~~~6.8 6.1 6.7 7.9 6.2 6.9 9.1 11 0 107 Public I/GDP 7.4 7.4 6.6 7.1 9 3 10.4 7.5 7.5 5.4 Bolivia GDFI/GDP 12.1 12.7 12.0 12.6 14.5 16.3 16.7 14.9 15.9 16.4 17.2 18.8 Private I/GDP 5.9 4.0 3.6 5.0 5.8 6 6 7.7 6 4 7 6 8.4 18.0 12.5 Public I/GDP 6.2 8.7 8 4 7.6 8.7 9.7 9.0 8.5 8.3 8.0 7.2 6.3 Brazil GDFIIGDP 18.8 19.7 20 2 21 4 22.8 24.4 22.5 21.3 21.8 22.8 23.6 24.3 23.0 19.9 18.9 18.0 28.0 23.2 24.3 26.9 22.9 19.6 19.6 20.4 20.7 20.5 19.1 19.5 19.9 Pnvate I/GDP 12 8 14.2 14.4 16 2 15.8 16 9 14.2 14.7 14.1 12.5 17.0 16 6 16 0 13.8 13.7 12.9 14.4 16.8 17.9 21 1 17.6 14.4 13.9 15 5 15.8 16 8 15.3 15.7 16.5 Public I/GDP 1 6.0 5.5 5 8 5.2 7.0 7.5 8.3 6.6 7 7 10.3 6.6 7.7 7.0 6.1 5.2 5.1 5.6 6.4 6.4 5.8 5.3 5.2 5.7 4.9 4.9 3.7 3.9 3.8 3.4 Bulgaria G2DFIIGDP 24.4 18.2 16.2 13.8 13.8 15.3 13.6 10.8 11.6 Private l}IDP 0.9 0.5 0.3 2.9 5.4 6.8 5.3 5 5 6 4 Public I/GDP 23.5 17.7 15.9 10.0 8.4 8.5 8.4 5.3 5.2 Cambodia GDFI/GDP 9.4 11.0 8.2 9.4 9.8 14.3 18.5 21.8 25.9 19.0 15.0 Private I/GDP 8.0 9.5 7.1 980 9.5 10.0 13.0 14.7 19.5 14.0 11.5 ____________________Public I/GDP 1.4 1.5 1.2 0.4 0.3 4.3 5.5 7.1 6.4 5.0 3.6 Cape Verde GDFI/GDP 31.3 24.4 26.3 25.5 29.1 37.9 43 6 51.3 49.6 44.8 44.5 45.7 Private I/GDP 7.0 7.8 11.9 14.1 15.3 9.0 12.7 13.4 17.9 15.3 23.0 26.3 Public 1/I3DP 124 3 16.6 14.4 11.4 13.8 28.9 31 0 37.9 31.7 29.5 21.5 19.4 Chad GDFI/GDP 1 1.8 11.6 11.9 14.4 14.4 Private I/GDP 4.4 5.3 5.6 7.8 9.0 Public I/GDP 7.4 6 3 6.3 6.6 5.4 Chile GDFIJGDP 16.4 14.5 12.2 7.9 21.2 13.9 12.8 14.5 17.8 17 8 16.6 18.6 14.2 12.0 12.4 16.8 17.1 19.4 20.3 23.0 23.1 19.9 22.4 24.9 23.3 23.9 24.8 25.2 25.2 Private IIGDP 9.5 6 5 4.5 0.5 9.2 3.2 4.8 7 6 11.4 12.6 11.2 13.4 9.5 7 4 6.4 14.1 13.6 13.1 14.4 18.2 18.4 13.0 16.7 18 9 18.0 19.9 19 6 20.4 22.1 Public I/GDP 6.9 8.8 7.7 7.4 12.0 10.7 8.0 6 9 6.4 5.2 5.4 5.2 4.7 4.7 6.0 2.8 3.5 6.4 5.9 4.8 4 8 4.9 5.8 6.0 5.3 3.9 5.2 4.8 3.1 China GDFI/GDP 20.2 19 8 23.2 24.1 25.6 28.4 30.6 31.7 31.8 26.1 24 4 25 9 30.3 37.7 36.4 34.2 33.8 33 5 35.8 Private I/GDP 3.7 6.0 7.3 8.1 9.8 9.6 102 11.2 11.6 9 5 8.3 8.7 9.7 14.9 15.9 15.6 16.1 15.9 16.4 Public I/GDP 16.5 13.7 16.0 16.0 16.5 18.7 20.4 20.5 20.2 16.6 16.1 17 2 28.6 22.9 20.6 186 17.7 17.6 19.4 Columbia GDFIIGDP 18.0 17.5 16.1 15.8 16.4 15.3 15.9 14.5 15.4 15.4 16 8 17 7 17.5 17.2 17.0 17.5 17.7 17.4 19.5 16.6 16.6 15.0 15 1 18.9 23.3 22.5 18.5 17.4 16.2 Private I/GDP 12.4 11.6 9.8 10.1 11.5 9.9 10 3 7 9 9.9 10.0 9.8 10.3 9.4 9.7 8.5 8.4 9.2 10.2 11.5 9.6 10.2 8 4 8.3 10.8 15.2 14.8 10 4 9.7 9.7 Public IIGDP 5.6 6.0 6.3 5.7 4.9 5.4 5.6 6.6 5.5 5.4 7.0 7.3 8. 1 7.5 8.5 9.2 8.5 7.3 8.0 7.0 6.4 6.5 6.7 8.1 8.1 7.7 8.2 7.7 6.5 Costa Rica GDFI/GDP 19.4 22.1 21.9 28.5 21.3 20.7 23.5 22.4 23.0 26.2 23.9 24.1 20 3 18.0 20.0 19.3 18.7 19.8 18.9 20.5 22 4 19.7 20.8 23.2 19.5 18.9 17.1 19.2 23.7 Private IIIDP 15.0 16.4 15.1 14.7 15.8 14.4 15.1 14.2 15 6 17.3 14.7 15.2 13.1 11.6 13 7 12.3 12.9 15.4 14.8 16.0 17.7 15.5 16 6 18.3 14.6 13.8 12.2 14.0 18 2 Public I/GDP 4.4 5.7 6.8 5.8 5.5 6 3 8.4 8.2 7.4 8.9 9.2 8.9 7 2 6.4 6.4 7.0 5.8 4.4 4.1 4.5 4.7 4.2 4.1 4 9 4 8 5.1 4.8 5.1 5.5 Cole dIlvoire GDFO/GDP 14.8 14.1 13.8 12.2 8 5 8.6 8.5 7.8 11.1 12.9 13 9 16 0 18.2 Private I/GDP 7.9 6 7 6.8 5.9 4.9 5.1 4.7 4.1 7.0 8.7 9.6 11.2 13.1 Public I/GDP 6.9 7 4 7.0 6.3 3.6 3.4 3.8 3.7 4.1 42 4.3 4.8 51 Dominican Republic GDF1IGDP 19.1 17 9 19. 22.2 23.3 24.5 22.3 21 7 21.0 23.9 23.9 22.8 18.7 20.3 21.0 18.3 20.6 26.0 27.1 28 2 24.9 21.6 22.5 26.4 23.6 21 5 21 0 21.9 25.~7 Private I/GDP 14.8 12.4 12.2 15.1 15 9 16.5 16.0 15.6 14 8 18.8 16.3 16.1 14.3 15.6 17.6 12.9 16.0 16.2 16.8 18.1 18.2 15.3 15 4 16.4 13 8 14 1 13.3 16.2 20.0 Public IIGDP 5.1 5 5 7.6 7.1 7.4 8.8 6.3 6 1 6.2 5.1 7.6 6.7 4.4 4.7 3.4 5.4 4.6 9.7 10.3 10.2 6.7 6.3 7.1 10.8 9.8 7 4 7.6 5.7 5.7 Ecuador GYDFI/GDP 16.7 21.8 18.0 17.6 18.2 23.2 22.2 23.6 26.2 23.7 23.6 22.3 22.7 16.6 15 4 16.1 18.8 22.7 21.3 20.7 18.4 19.7 19.5 19.9 18.8 18 6 178a 19.0 Private I/GDP 10.0 14.7 11.4 10.8 10.2 14.5 13 0 13.4 16.8 14.5 14.1 11 7 13.0 8.6 9.0 9.5 9 6 13.4 12.7 11.6 12.4 12.6 12.4 13.2 12.8 13.1 11.7 13.3 Public IIGDP 6.7 7.1 6.6 6.8 8.0 8.7 -9.2 10 2 9.4 9.2 9.5 10.6 9.7 8.0 6.4 6.6 9.2 9.3 8.6 9.2 6.1 7.0 7.1 6.7 6.0 5 5 6.1 5.7 Egypt G3DFIIGDP 38.1 34.2 32.1 32.1 34.4 27.4 34.5 30.6 26.9 22.2 19.1 16.2 16.6 16.5 16.0 17 6 19.4 Private I/GDP 9.1 13.9 13 1 12.7 13.2 10.1 13.3 16.0 16.7 13.1 10.5 9.2 10.5 10.9 10.5 12.1 13.1 Public I/GDP 21.0 20.3 19.0 19.4 21.3 17.3 21.2 14.6 10.2 9.2 8.5 7.1 6.1 5.6 5.5 5.6 6.3 El Salvador GDF1/GDP 10.7 11.2 14.1 12.4 14.2 23.0 20.1 21.2 21,4 17.6 13.6 13.6 12.6 11.6 11.5 12.0 13.1 13.6 12.6 13.3 13.7 15.2 17.2 1I7.8 1 -8.6 18.6 15.5 16.0 16.7 Private I/GDP 8.4 8.3 10 1 8.8 9.5 15.0 13.9 13.9 15.6 11.5 6.4 6.2 6.5 7.0 7.6 8.7 10.6 10.7 9.5 9.8 11 2 12.3 13.2 13.7 14.7 15.0 11.3 12.3 12.8 Public I/GDP 2.3 2.9 4.0 3.6 4 7 8.0 6.2 7.3 5.8 6.1 7.1 7.3 6.1 4.6 3.9 3.3 2.5 2.9 3.1 3.5 2.5 2.8 4.0 4.0 3.8 3.6 4.2 3.7 3.9 _ l0 ~ C - C 'CnO ios i tCll0Cl.CC OCl f s i>r ov OCllll S 00Cx x l'x 00vClClcCCCx o Cl0CCllCe-0'C Clen0n Cl00ClClCl'CClCl00-Cl1--0Cl b O _ 4e C'C-CxeCC 00lCC0Cl0Cl00ClC o~~~~~C - s Nd - - _ C lC -_l Sl C l-< n0 - e C l~ o s_xnS>SMxxv mclCl x>N>Se _ l0 ' C ClClClClCl _0 _0 -_ 'C o£ eCl-O Cl00 Cl-- >> a£ ClClOCa lC l00 ClCl s £C l > Cl Cl 00 00 lle e C 'C xC 00 o 0 xl ol - Co x0 _C Cl Cl 'C -s Cl 'C Cl xC Cl Cl s eC l xl l Co l Cl 00 Cl 00 o _l Cl C ol C XC C o_ _ 1 _ r l - o- - ' r _ ClC5 l o o f x V o x o x t v u i x a x N G ° o C'ov C --¢S __>--N r~~l ClCl Cl C l ernwen - r rr eee C Sro l-vr-evoCo l…xr sa;o ClaCx vl C Cl r ' l Cl Cl x l 'C x l Cl C x l r r - l Cl Cl Cl C Cl Cl Cl l Cl 00o C 'C Cl o 00 'C C Cl _ Cl r Cl 'C 00 00 x C 0 Cl Cl o Cl Cl C v x - x x -orl- __ C> l C lCl- C l - Cl _ r - - _ 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