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Policy changes that encourage private business investment in Colombia

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  • Dailami, Mansoor

Abstract

Private business investment has expanded remarkably in Colombia's recent economic recovery. Sustained expansion of this investment is considered crucial to continued economic growth and increases in production. Having analyzed demand, the cost of capital, and the availability and allocation of investable funds, the paper makes the following conclusions. First, motivating firms to expand capacity is a key requirement for continued expansion. Secondly, frequent forecasting of such variables as GDP, interest and exchange rates, and credit and monetary aggregates, would tend to improve the climate for investment. Also, the real (marginal) cost of capital to the nonfinancial corporate sector is high: currently about 16 percent. Policy efforts that induce corporations to substitute equity for debt financing should lead to a more balanced corporate capital structure and possibly a lower overall cost of capital. It could also be reduced by shifting the tax treatment of depreciation allowances away from historical cost accounting system toward a replacement cost accounting system. Finally, high inflation and low savings rates keep the prevailing lending rates high in Colombia - and it is generally easier for larger firms to get capital than for small and medium-size firms.

Suggested Citation

  • Dailami, Mansoor, 1989. "Policy changes that encourage private business investment in Colombia," Policy Research Working Paper Series 266, The World Bank.
    • Handle: RePEc:wbk:wbrwps:266
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    References listed on IDEAS

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    1. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
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    Cited by:

    1. Buckley, Robert & Dokeniya, Anupam & INU & PRE, 1989. "Inflation, monetary balances and the aggregate production function : the case of Colombia," Policy Research Working Paper Series 366, The World Bank.
    2. Shafik, Nemat, 1990. "Modeling investment behavior in developing countries : an application to Egypt," Policy Research Working Paper Series 452, The World Bank.
    3. Matin, Kazi M. & Wasow, Bernard, 1992. "Adjustment and private investment in Kenya," Policy Research Working Paper Series 878, The World Bank.

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