Providing incentives for efficient investment

Investment in social, economic and political infrastructure, in industry and in service sectors is clearly necessary but projects too often fail to generate significant increase in output. Genuine mistakes and misfortunes can only account for limited number of these, failure is due more often to projects being selected on the basis of political prestige or of inadequate regard for their probable economic and financial rate of return. Even in East Asia, where public money is invested relatively efficiently, greater care and prudence could be used in making economic appraisals.

Government policy has a profound effect on the type and volume of private investment in developing countries. The mistake of many governments which want to promote domestic manufacturing industries is to protect them with import barriers and subsidize their costs through repressed interest rates and overvalued exchange rates. Supplementing these policies by price controls and subsidies designed to help the poor tends mainly to benefit those who could afford to pay more. The overall result is a boost in consumption which encourages local producers to concentrate on the home market and neglect exports, reducing foreign exchange earnings.