5.1 Credit, investment, and expenditure
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About the data
Definitions
Data sources
How big should a government be?
And what should its role be in nurturing, regulating, or monitoring the functioning of markets? The model state for many classical economists and philosophers in the 19th century was a minimal one that left most activities to markets. In the 1870s governments were generally small: in what are today's major industrial countries government spending amounted to just over 8 percent of GDP. In 1994 government spending for the same countries averaged 47 percent of GDP, reflecting large increases in defense spending and the provision of goods and services, such as infrastructure, education, health care, and social safety nets (Tanzi and Schuknecht 1995). Developing countries generally have much smaller governments, largely reflecting a much smaller commitment to a welfare state.
Governments have two principal responsibilities: providing rules to make markets work efficiently and taking corrective actions when markets fail. These responsibilities encompass many of the traditional functions of the state: establishing law and order, ensuring property rights, and providing goods and services that the private sector cannot or will not provide, including universal education, public health services, and basic infrastructure.
The indicators in the table measure the relative size of the state and markets in the national economy. There is no ideal size for the state, and size alone does not capture its full effect on markets. Large states may support prosperous and effective markets; small states may be predatory toward markets. The resources of a large state may be used to correct genuine market failures in key areas—or merely to subsidize state enterprises making goods or providing services that the private sector might have produced more efficiently. A large share of private domestic investment in total investment may reflect a highly competitive and efficient private sector—or one that it is subsidized and protected. Thus, like other indicators in this volume, the indicators here provide an important but far from complete picture of what they measure—in this case the roles of states and markets.
Because data on subnational units of government—state, provincial, and municipal—are not readily available, the size of the public sector is measured here by the size of the central government. While the central government is usually the largest single economic agent in a country and typically accounts for most of the revenues, expenditures, and deficits of the public sector, in some countries state, provincial, and local governments are important participants in the economy. In addition, the activities covered under "central government" can vary depending on the accounting concept used (consolidated or budgetary). For most countries central government finance data have been consolidated into one overall account, but for others only budgetary central government accounts are available, which often omit the operations of state-owned enterprises (see Primary data documentation).
When direct estimates of private gross domestic fixed investment are not available, such investment is estimated residually as the difference between total gross domestic investment and consolidated public investment. Total investment may be estimated directly from surveys of enterprises and administrative records or indirectly using the commodity flow method. Consolidated measures of public investment may omit important subnational units of government. In addition, public investment data may include financial as well as physical capital investment. As the difference between two estimated quantities, private investment may be undervalued or overvalued and subject to large errors over time.
Statistics on foreign direct investment are based on balance of payments data reported by the International Monetary Fund (IMF), supplemented by data on net foreign direct investment reported by the OECD and official national sources. The data suffer from deficiencies relating to definitions, coverage, and cross-country comparability (see the notes to table 5.2 for a detailed discussion of data on foreign direct investment).
Data on domestic credit to the private sector are taken from the banking survey of the IMF's International Financial Statistics or, when the broader aggregate is not available, from its monetary survey. The monetary survey includes monetary authorities (the central bank) and deposit money banks. In addition to these, the banking survey includes other banking institutions such as savings and loan institutions, finance companies, and development banks. In some cases credit to the private sector may include credit to state-owned or partially state-owned enterprises.
• Private investment covers outlays by the private sector (including private nonprofit agencies) on additions to its fixed assets. Gross domestic fixed investment includes similar outlays by the public sector.
• Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. Gross domestic investment is gross domestic fixed investment plus changes in stocks.
• Credit to private sector refers to financial resources provided to the private sector—such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable—that establish a claim for repayment. For some countries these claims include credit to public enterprises.
• Private nonguaranteed debt consists of external obligations of private debtors that are not guaranteed for repayment by a public entity. Total external debt is the sum of public and publicly guaranteed long-term debt, private nonguaranteed long-term debt, IMF credit, and short-term debt.
• Central government expenditure comprises the expenditures of all government offices, departments, establishments, and other bodies that are agencies or instruments of the central authority of a country. It includes both current and capital (development) expenditures.
Private investment data are from the International Finance Corporation's Trends in Private Investment in Developing Countries 1996. Data on foreign direct investment are based on estimates compiled by the IMF in the Balance of Payments Statistics Yearbook, supplemented by World Bank staff estimates. Data on domestic credit are from the IMF's International Financial Statistics, and government expenditure data are from the IMF's Government Finance Statistics Yearbook. External debt figures are from the World Bank's Debtor Reporting System as reported in the World Bank's Global Development Finance 1997 (formerly World Debt Tables).
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