Abstract:A recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. We briefly summarize the theory, stressing its empirical implications. We then use cross-section and time-series data for a set of developing and industrialized countries to explore the relevance of the theory for aggregate investment. We find that the volatility of the marginal profitability of capital -a summary measure of uncertainty -affects investment as the theory suggests, but the size of the effect is moderate, and is greatest for developing countries. We also find that this volatility has little correlation with indicia of political instability used in recent studies of growth, as well as several indicia of economic instability. Only inflation is highly correlated with this volatility, and is also a robust explanator of investment. JEL Classification Numbers: E22; D92, E61.Keywords: Investment, uncertainty, irreversibility, economic instability, inflation.*Prepared for the NBER Macroeconomics Conference, March 12, 1993. The research leading to this paper was supported by M.I.T.'s Center for Energy and Environmental Policy Research, by the National Science Foundation through Grant No. SES90-22823 to R. Pindyck, and by the World Bank. Our thanks to Raimundo Soto and Yunyong Thaicharoen for their outstanding research assistance, to Sebastian Edwards for providing his data on political risk variables, and to Fischer Black, Olivier Blanchard, Michael Bruno, Ricardo Caballero, Jose de Gregorio, Janice Eberly, Stanley Fischer, Robert Hall, and Alwyn Young for helpful comments and suggestions.

Abstract:A recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. We briefly summarize the theory, stressing its empirical implications. We then use cross-section and time-series data for a set of developing and industrialized countries to explore the relevance of the theory for aggregate investment. We find that the volatility of the marginal profitability of capital -a summary measure of uncertainty -affects investment as the theory suggests, but the size of the effect is moderate, and is greatest for developing countries. We also find that this volatility has little correlation with indicia of political instability used in recent studies of growth, as well as several indicia of economic instability. Only inflation is highly correlated with this volatility, and is also a robust explanator of investment. JEL Classification Numbers: E22; D92, E61.Keywords: Investment, uncertainty, irreversibility, economic instability, inflation.*Prepared for the NBER Macroeconomics Conference, March 12, 1993. The research leading to this paper was supported by M.I.T.'s Center for Energy and Environmental Policy Research, by the National Science Foundation through Grant No. SES90-22823 to R. Pindyck, and by the World Bank. Our thanks to Raimundo Soto and Yunyong Thaicharoen for their outstanding research assistance, to Sebastian Edwards for providing his data on political risk variables, and to Fischer Black, Olivier Blanchard, Michael Bruno, Ricardo Caballero, Jose de Gregorio, Janice Eberly, Stanley Fischer, Robert Hall, and Alwyn Young for helpful comments and suggestions.

This article reviews theories of investment behavior and examines empirical studies of investment in developing couintries. The emphasis is on understanding the interactions among macroeconomic policies, structural adjustment, and private investment. The article deals with the effect of exchange rate policy on investment, the relationship between public and private investment, the importance of market imperfections and financial constraints on capital formation, and the effect of economic instability on irreversible investment decisions. T he correction of external imbalances in many developing countries during the 1980s took the form of large cuts in investment rather than increases in domestic savings. This decline in investment, which mirrored the decline in the transfer of external resources after 1982, was especially sharp in the highly indebted1 countries and was accompanied by slowed growth in these and other developing countries. In addition, both public and private rates of investment fell, although the decline in private investment was more drastic. If this trend continues, it will slow potential growth in these economies and will reduce long-run levels of per capita consumption and income, endangering the sustainability of the adjustment effort. This reduction in investment seems to reflect several factors. First, the decline in the availability of foreign savings has not been matched by a

Human talent is a key economic resource and a source of creative power in science, technology, business, arts and culture, and other activities. Talent has a large economic value and its mobility has increased with globalization, the spread of new information technologies, and lower transportation costs. Well educated and/or talented people are often more internationally mobile than unskilled workers. Moreover, immigrants with high human capital face more favourable immigration policies in receiving countries; typically high per capita income economies short of information technology experts, scientists, medical doctors, and other types of talent. This chapter reviews analytical and policy issues related to the international mobility of talented individuals. Main types of talent (those engaged in directly productive activities, academic talent, and qualified human resources in the cultural and health sectors) are identified and studied. It also looks at special topics such as the market and social rewards to talent, the relation between formal education and talent, wage convergence and divergence. Critical themes for public policy of this mobility for source and destination countries and for global development are highlighted.

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