Crowding Out Private Investment in Bolivia: Evidence for the 1988–2010 Period

This article analyzes whether public investment has crowded out private investment in Bolivia during the 1988–2010 period. The evidence demonstrates that this is generally the case, as public investment has been shown to consistently run counterclockwise to private investment. Interestingly, the quality of the institutional setting and the openness of the economy to trade with other nations do not seem to matter to the relation between public investment and private investment. The findings suggest, however, that increases in domestic credit to the private sector lessen the crowding-out effect, which calls attention to the importance of a stable and healthy financial system as a way to encourage private investment.