Abstract
This compilation of summaries of Working Papers released during January-June 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201
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.