The Forgotten Rationale for Policy Reform: The Productivity of Investment Projects

44 Pages Posted: 20 Apr 2016

See all articles by Jonathan Isham

Jonathan Isham

Middlebury College - Department of Economics

Daniel Kaufmann

Results for Development; The University of the Philippines Diliman; The Brookings Institution

Date Written: November 1995

Abstract

Using economic rates of return from more than 1,200 public and private sector projects implemented in 61 developing countries, the authors analyze determinants of investment productivity. Results from Tobit estimation demonstrate that the degree of countrywide policy distortions - macroeconomic, exchange rate, trade and pricing - critically affects the productivity of investments. Countries with undistorted policies are likely to be unproductive investments. In countries with distorted policies, investments are likely to be unproductive. And within a country, investments become more productive when economic policymaking improves. The productivity of projects in the tradable sectors are also affected (in a nonlinear fashion) by the size of a country's public investment program. The authors discuss possible selection biases in this data set, present tests of robustness, and highlight policy implications. In particular, donor financing for improvements in the policy climate is likely to pay off. A powerful rationale for supporting structual reform is that it raises the productivity of both public and private investments.

Suggested Citation

Isham, Jonathan and Kaufmann, Daniel, The Forgotten Rationale for Policy Reform: The Productivity of Investment Projects (November 1995). Available at SSRN: https://ssrn.com/abstract=636138

Jonathan Isham (Contact Author)

Middlebury College - Department of Economics ( email )

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Daniel Kaufmann

Results for Development ( email )

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The University of the Philippines Diliman ( email )

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The Brookings Institution ( email )

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