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Policy changes that encourage private business investment in Colombia, Volume 1
Author:Dailami, Mansoor; Country:Colombia;
Date Stored:1989/08/01Document Date:1989/08/31
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; International Terrorism & Counterterrorism; Economic Theory & Research; Banks & Banking Reform; Financial Intermediation
Language:EnglishMajor Sector:Finance
Region:Latin America & CaribbeanReport Number:WPS266
Sub Sectors:Other FinanceCollection Title:Policy, Planning and Research Department working papers ; no. WPS 266
Volume No:1  

Summary: Private business investment has expanded remarkably in Colombia's recent economic recovery. Sustained expansion of this investment is considered crucial to continued economic growth and increases in production. Having analyzed demand, the cost of capital, and the availability and allocation of investable funds, the paper makes the following conclusions. First, motivating firms to expand capacity is a key requirement for continued expansion. Secondly, frequent forecasting of such variables as GDP, interest and exchange rates, and credit and monetary aggregates, would tend to improve the climate for investment. Also, the real (marginal) cost of capital to the nonfinancial corporate sector is high: currently about 16 percent. Policy efforts that induce corporations to substitute equity for debt financing should lead to a more balanced corporate capital structure and possibly a lower overall cost of capital. It could also be reduced by shifting the tax treatment of depreciation allowances away from historical cost accounting system toward a replacement cost accounting system. Finally, high inflation and low savings rates keep the prevailing lending rates high in Colombia - and it is generally easier for larger firms to get capital than for small and medium-size firms.

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