Understanding the investment cycle in adjustment programs: evidence from reforming economies

Andres Solimano

No 912, Policy Research Working Paper Series from The World Bank

Abstract: The author reviews recent literature on capital formation and economic reform and looks at the cycle of private investment that occurs during adjustment. He identifies three phases in the response of private investment to adjustment programs: initial contraction, a long pause, and sustained recovery. The empirical evidence from Chile, Mexico, and Thailand shows that the initial contraction lasts from one to two years and the pause for three to five years. Moreover, the length of the investment pause is longer for low-income countries such as Bolivia and Ghana. Also, the cycle of public investment is of greater amplitude than the cycle of private investment. In characterizing the cycles of investment, the author assesses the role of such factors as demand restraint, currency depreciation, the value of waiting, credibility failures, and the lack of supportive infrastructure.

Keywords: Economic Theory&Research; Environmental Economics&Policies; Trade and Regional Integration; Macroeconomic Management; International Terrorism&Counterterrorism (search for similar items in EconPapers)
Date: 1992-05-31
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