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"Crowding in" and the returns to government investment in low-income countries, Volume 1
 
Author:Eden, Maya; Kraay, Aart; Country:World;
Date Stored:2014/02/18Document Date:2014/02/01
Document Type:Policy Research Working PaperSubTopics:Access to Finance; Non Bank Financial Institutions; Emerging Markets; Debt Markets; Investment and Investment Climate
Language:EnglishMajor Sector:Public Administration, Law, and Justice; Finance
Rel. Proj ID:1W-Reforms And Growth -- -- P080834;ET-Sustainability Of Growth Model -- -- P147500;Region:The World Region
Report Number:WPS6781Sub Sectors:Central government administration; General finance sector; General public administration sector
Collection Title:Policy Research working paper ; no. WPS 6781TF No/Name:TF012576-PHRD Staff Grant Support for Tomoko Wada; TF098053-KCPII - Industrial Policy in an Uncertain Environment; TF099120-KCP; TF099853-PHRD STAFF GRANT SUPPORT FOR TOMOKO WADA
Volume No:1  

Summary: This paper estimates the effect of government investment on private investment in a sample of 39 low-income countries. Fluctuations in a predetermined component of disbursements on loans from official creditors to developing country governments are used as an instrument for fluctuations in public investment. The analysis finds evidence of "crowding in": an extra dollar of government investment raises private investment by roughly two dollars, and output by 1.5 dollars. To understand the implications for the return to public investment, a CES production function with public and private capital as inputs is calibrated. For most countries in the sample, the returns to government investment exceed the world interest rate. However, for some countries that already have high government investment rates, the return to further investment is below the world interest rate.

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