Inversion Privada

MASTER F I L E S
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This is a working paper and the author would welcome any
comments on the present text. Citations should refer to an
unpublished manuscript, mentioning the author and the
date of issuance by the International Monetary Fund. The
views expressed are those of the author and do not necessarily represent those of the Fund.

IMF WORKING PAPER
© 1989International Monetary Fund

WP/89/60

INTERNATIONAL MONETARY FUND
Research Department

Private Investment and Economic Growth in Developing Countries
Prepared by Mohsin S. Khan and Carmen M. Reinhart*
July 26, 1989

Abstract
Despite the growing support for market-oriented strategies, and for
a greater role of private investment, empirical growth models for developing countries typicallymake no distinction between the private and
public components of investment. This paper sheds some light on this
important issue by formulating a simple growth model that separates the
effects of public sector and private sector investment. This model is
estimated for a cross-section sample of 24 developing countries, and the
results support the notion that private investment has a largerdirect
effect on growth than does public investment.

JEL Classification Number:
111

*We are grateful to Joshua Greene, Deena Khatkhate, Peter Montiel, and
Delano Villanueva for helpful comments, and to Ravina Malkani for
excellent assistance.

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Contents

Page

II.
III.

Introduction

1

Specification of the Growth Model

2

Results

6

1.
2.

I.

6
10Empirical estimates
Sources of growth

Conclusions

12

1.
2.

IV.

Results for Growth Models
Average Sources of Growth

7
11

Relationship between ratio of private investment
to total investment and real growth

10a

Tables

Chart 1.

Appendix

15

References

16

I.

Introduction

The recent economic difficulties facing many developing countries-wideningcurrent account and
inflation rates, growing foreign debt burdens, and perhaps most
importantly, falling growth rates that have sharply reduced living
standards--have led to a fundamental re-examination of adjustment and
development strategies. Specifically, the sentiment in the profession
and in policymaking circles has shifted against large-scale government
intervention and towards greaterreliance on the market in the allocation
and use of resources. 1/ Thus, market-based reforms are now considered
part and parcel of what has come to be known as growth-oriented
adjustment. 2/ Conventional wisdom has it that the way to prosperity,
as represented by a sustained higher rate of economic growth, requires
stable and conservative macroeconomic policies, liberalization of the
goods andfactor markets, greater flexibility in the financial system,
and an enhanced role for the private sector in economic activity.
While the merits of a market-based economic system are wellestablished under certain theoretical conditions, far less is known
of its empirical relevance in the developing world. Supporters of
market-oriented adjustment strategies, which include importantmultilateral institutions like the International Monetary Fund and the
World Bank, point to the experiences of Korea and certain other (Asian)
newly-industrialized economies, the recent performance of Turkey, and
Chile during certain periods. Furthermore, there is a substantial body of
literature indicating that trade liberalization encourages faster economic
growth. 3/ In addition, there is somesupport for a positive relationship
between financial development--usually taken to mean freer interest
rates--and growth performance. 4/ These relationships are usually
perceived as operating through increased private savings and investment.
What is missing, however, in all this discussion is any evidence on the
relationship between private sector activity, in particular private
investment, and...