Economic Security, Private Investment, and Growth in Developing Countries


WP/98/4-EAWP/98/4


.Economic Security, Private Investment, and Growth in Developing Countries.
Hélène Poirson, , , , and ,

summary


This paper provides empirical support for the view that enhanced economic
security fosters private investment and growth in developing countries, based
on an analysis of economic security ratings for 53 developing countries during
1984-95. The paper shows that most aspects of economic security have improved
significantly, contributing to private investment and economic growth.


The implied gains from institutional reforms to improve economic security are
significant. The empirical results suggest that reforms to improve economic
security in specific developing country regions to .best practices. in other
developing country regions could raise private investment by ½ to 1 percentage
point of GDP in the short to medium term. In the longer term, the payoff in
real economic growth could be on the order of ½ to 1¼ percent a year. The
results suggest the following key areas for institutional reforms in developing
regions: In Africa, the priorities are to reduce the risks of expropriation in
order to raise private investment and improve the efficiency of resource
allocation; to reduce corruption and the risks of contract repudiation by
government in order to raise longer-term growth prospects; and to increase the
scope of civil liberties and the quality of the bureaucracy in order to raise
private sector confidence. In Asia, the priorities are to increase civil
liberties to further boost private sector confidence, and to reduce corruption
to raise longer-term growth prospects. In the Western Hemisphere, the
priorities are to improve the quality of the bureaucracy in order to allow a
further rise in private investment, and to reduce corruption to raise
longer-term growth prospects. Finally, in the Middle East and Europe, the
priority is to increase civil liberties to further boost private sector
confidence.