Inventories in Developing Countries: Levels and Determinants - a Red Flag for Competitiveness and Growth

25 Pages Posted: 20 Apr 2016

See all articles by J. Luis Guasch

J. Luis Guasch

World Bank - Finance, Private Sector and Infrastructure Sector (LCSFP)

Joseph Kogan

Lehman Brothers, New York

Date Written: January 2001

Abstract

High inventory levels in developing countries increase the cost of doing business and limit productivity and competitiveness. Improvements in infrastructure (roads, ports, and telecommunications) and in market development can help to significantly reduce inventory levels (and thus the cost of doing business), especially when accompanied by effective regulation and the development and deregulation of associated markets.

Raw materials inventories in the manufacturing sector in the 1970s, 1980s, and 1990s were two to five times as high in developing countries as in the United States, despite the fact that in developing countries real interest rates are at least twice as high. Given the high cost of capital in most developing countries, these high inventory levels have an enormous impact on the cost of doing business and on productivity and competitiveness. Poor infrastructure and ineffective regulation as well as deficiencies in market development - rather than the traditional factors used in inventory models, such as interest rates and uncertainty -are the main determinants of these differences.

Cross-country estimates show that a one-standard-deviation improvement in infrastructure reduces raw materials inventories by 27-47 percent. Poorly functioning markets, as measured by the ratio of transfers and subsidies to GDP, are also an important factor, with a one-standard-deviation improvement leading to a 19-30 percent reduction in raw materials inventories.

Guasch and Kogan show that these reductions in raw materials inventories are not offset by a reduction in finished goods inventories upstream. The policy implications are clear and strong. Improvements in infrastructure (roads, ports, and telecommunications) can help to significantly reduce inventory levels (and thus the cost of doing business), especially when accompanied by effective regulation and the development and deregulation of associated markets.

This paper - a joint product of the Office of the Senior Vice President and Chief Economist, Development Economics, and the Finance, Private Sector, and Infrastructure Sector Management Unit, Latin America and the Caribbean Region - is part of a larger effort in the Bank to assess and improve the competitiveness and productivity of developing countries. The authors may be contacted at

Suggested Citation

Guasch, José Luis and Kogan, Joseph, Inventories in Developing Countries: Levels and Determinants - a Red Flag for Competitiveness and Growth (January 2001). World Bank Policy Research Working Paper No. 2552. Available at SSRN: https://ssrn.com/abstract=632619

José Luis Guasch (Contact Author)

World Bank - Finance, Private Sector and Infrastructure Sector (LCSFP) ( email )

1818 H Street, NW
Washington, DC 20433
United States
202 473 8606 (Phone)
202 522 2106 (Fax)

Joseph Kogan

Lehman Brothers, New York ( email )

745 Seventh Avenue
New York, NY 10019
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
194
Abstract Views
1,229
rank
154,321
PlumX Metrics