Analysis of Determinants of Private Investment in Ethiopia

Amanu Daba Waktola

doi:10.7176/jesd/12-7-03

Abstract

To make private investment more attractive, most African countries have liberalized market and attempted to create enabling environment in recent decades. Ethiopia, like many African countries, took some steps towards liberalizing market and the macroeconomic regime as well as introducing some measures aimed at improving the investment regulatory framework. This study analyses the determinants of private investment in Ethiopia using a time series analysis over the period of 1975 to 2009. The study gave an extensive account of the theoretical explanation of private investment as well as reviewing the policy regimes, the investment regulatory framework and institutional set up in the country over the study period. It also undertakes empirical analysis to establish the determining factors of private investment in Ethiopia. Our findings show that growth rate of real GDP, availability of credit, and public investment among others, have positive impact on private investment. On the other hand, macroeconomic instability (liberalization), lending rate, and consumer price index (CPI) have negative impact on private investment. The results suggest that policies that address only some components of macroeconomic instability may not be enough to revive private investment. Thus, the findings imply that liberalization of the market and regulatory regimes, stable macroeconomic and political environment, and major improvements in infrastructure are essential to attract private investors to Ethiopia

Highlights

One of the fundamental questions of all developing countries is how to get their economic growth faster
Specific Objectives To investigate the performance of private investment in Ethiopia based on empirical facts To identify the impact of the government policy on private investors To evaluate the pre-reform and current trends of private investment performance To suggest policy recommendation that might solve the problem of low performance of private investment in Ethiopia To analyses the determents of private investment using econometrics model
When we look in cases of lending rate, it has opposite relationship with that of private investment, this is why it shows negative sign when we regress it

Summary

Introduction

One of the fundamental questions of all developing countries is how to get their economic growth faster. Among a number of alternative factors, that boosts economic growth, investment play important role. Investment can be made either by public or by the private sector. The idea of developing private sector as an alternative development strategy to improve economic growth and reduce poverty in developing countries emerged in late 1980’s. The International Monetary Fund (IMF) and World Bank through International Financial Corporation (IFC) are the forerunners of this strategy in many developing countries. Recent evidence on economic development indicates that private sector, in effective with the public sector, has the way to overcome poverty in Africa. Recent evidence on economic development indicates that private sector, in effective with the public sector, has the way to overcome poverty in Africa. (Gutierrez Z., 2005)

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Conclusion