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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/30: “Determinants of Private Investment in Pakistan”

Author(s):
International Monetary Fund
Published Date:
August 1993
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The paper investigates the determinants of private investment in Pakistan, in particular, the impact upon it of government investment. A selected review of the theoretical and empirical literature indicates that investment functions in developing countries differ from those in developed countries in that credit availability and government investment--especially in infrastructure--play a far more important role in the former. The impact of government investment is shown to depend primarily on both its structure and the characteristics of the economy.

Building on the above, the paper specifies and estimates a private investment function for Pakistan for the period 1973/74-1991/92. The results suggest that private investment was positively correlated with GDP growth, with credit extended to the private sector, and with government investment. To investigate the issue further, the paper disaggregates government investment into its infrastructural and noninfrastructural components. It concludes that noninfrastructural government investment appears to be negatively correlated with private investment.

In assessing policy implications, the paper stresses the importance of taking into account the prevailing macroeconomic framework, including the contribution of macroeconomic stability to stimulating private investment. The paper argues that in promoting both infrastructural government investment and credit extended to the private sector, policymakers must give due consideration to maintaining macroeconomic stability.

Finally, it is noted that, as in other countries undergoing fundamental structural changes, the investment function in Pakistan is likely to evolve. For example, with further liberalization of financial markets, the interest rate variable is expected eventually to supersede the availability of credit in the investment function. Similarly, the impact of government investment is expected to evolve, with a shift in the relative importance of crowding-out and crowding-in effects in favor of the former. It is unlikely, however, that the positive impact of infrastructural government investment will decline significantly in the next few years provided that qualifications regarding efficiency and macroeconomic stability are not seriously violated.

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