Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa

Luis Servén

Journal of African Economies, 1997, vol. 6, issue 3, 229-68

Abstract: A recent, but rapidly growing, literature has focused on the impact of uncertainty and instability on the adoption of fixed investment projects, showing that if the latter are costly or impossible to reverse, uncertainty can become a powerful investment deterrent. The purpose of this paper is twofold. First, to review the recent analytical and empirical literature on irreversible investment, drawing its implications for macroeconomic policy. Second, to gauge the practical importance of the uncertainty-investment link, particularly for Sub-Saharan Africa. To this end, the paper presents empirical evidence on the negative association between investment performance and instability measures using a large cross-country time-series data set. The comparative evidence suggests that uncertainty and instability are important factors behind Africa's poor investment record over the last two decades. Copyright 1997 by Oxford University Press.

Date: 1997
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