Private Investment in Developing Countries: The Effects of Commodity Shocks and Uncertainty

Abstract

The link between ex post discrete shocks and private investment have never been formally tested in a panel data context, while the evidence of a link between ex ante commodity price uncertainty and investment is weak.This paper constructs measures of discrete shocks and uncertainty using a new multi-country data set of aggregate commodity price indices, and tests the relationship between various manifestations of commodity price variability and private investment rates within the context of a canonical empirical investment model estimated on a sample of 44 developing countries.The analysis confirms theoretical predictions that positive ex post commodity price shocks have strong positive effects on private investment rates in low income developing countries, conditional upon the level of commodity prices.It is also shown that the prospect of uncertain future commodity prices and ex post negative shocks do not affect private investment rates.