Inventories in Developing Countries : Levels and Determinants--A Red Flag for Competitiveness and Growth

Raw materials inventories in the manufacturing sector in the 1970s, 1980s, and 1990s were two to five times as high in developing countries as in the United States, despite the fact that in most developing countries real interest rates are at least...

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Bibliographic Details
Main Authors:	Guasch, J. Luis, Kogan, Joseph
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ACTUAL COSTS AFFILIATES AGGREGATE DEMAND AGGREGATE INVENTORY CD COMMODITY COMPETITIVENESS COST OF CAPITAL CURRENT EXPENDITURES DEFICITS DELIVERIES DELIVERY TIMES DEREGULATION DEVELOPED COUNTRIES DEVELOPMENT ECONOMICS ECONOMICS LITERATURE ECONOMIES OF SCALE ECONOMISTS EMPLOYMENT EQUILIBRIUM FIXED COSTS FREIGHT GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATE HANDLING IMPORTS INCOME INEFFICIENCY INFLATION INFLATION RATE INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INVENTORIES INVENTORY INVENTORY HOLDING COSTS INVENTORY MANAGEMENT INVENTORY MODELS INVENTORY SYSTEMS MANUFACTURING MARGINAL COST MARKET PRICES MATHEMATICAL MODELS NOMINAL INTEREST RATES OPTIMIZATION ORDERING PRODUCTION COSTS PRODUCTION TECHNOLOGY PRODUCTIVITY PUBLIC ENTERPRISES QUALITY ASSESSMENT QUALITY CONTROL SAFETY STOCK SAVINGS SHIPMENTS STOCKS TELECOMMUNICATIONS THIRD PARTY LOGISTICS TIME SERIES TRANSACTION COSTS TRANSIT TRANSPORT WORKING CAPITAL
Online Access:	http://documents.worldbank.org/curated/en/2001/02/1003163/inventories-developing-countries-levels-determinants-red-flag-competitiveness-growth http://hdl.handle.net/10986/19711

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Summary:	Raw materials inventories in the manufacturing sector in the 1970s, 1980s, and 1990s were two to five times as high in developing countries as in the United States, despite the fact that in most developing countries real interest rates are at least twice as high. Given the high cost of capital in most developing countries, these high inventory levels have an enormous impact on the cost of doing business and on productivity and competitiveness. Poor infrastructure and ineffective regulation as well as deficiencies in market development - rather than the interest rates and uncertainty - are the main determinants of these differences. Cross-country estimates show that a one-standard-deviation improvement in infrastructure reduces raw materials inventories by 27-47 percent. Poorly functioning markets, as measured by the ratio of transfers and subsidies to GDP, are also an important factor, with a one-standard-deviation improvement leading to a 19-30 percent reduction in raw materials inventories. The authors show that these reductions in raw materials inventories are not offset by a reduction in finished goods inventories upstream. The policy implications are clear and strong. Improvements in infrastructure (roads, ports, and telecommunications) can help to significantly reduce inventory levels (and thus the cost of doing business), especially when accompanied by effective regulation and the development and deregulation of associated markets.

Inventories in Developing Countries : Levels and Determinants--A Red Flag for Competitiveness and Growth

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