Assessing the Bi-Causal Relationship Between Private Investment and Public Investment in SSA: Evidence from Panel Vector Autoregression Approach

Samuel Kwaku Agyei

doi:10.7176/jesd/10-12-02

Abstract

Research on crowding-in crowding-out hypothesis have been many but show inconsistent results and neglect of the possibility of a bi-causal relationship between private and public investment. Using data from Sub-Saharan Africa (SSA) and based on a Panel Vector Autoregressive model (PVAR), the results show that public and private physical capitals are compliments and mutually dependent. Consequently, in SSA, public infrastructure attracts private investment much the same as private infrastructure but the response of private to public is faster. Thus, countries in SSA should undertake policies to bridge the public infrastructural gap as a means of attracting private investment for development. Also, private investors need to do more probably through lobbying or bargaining in order to attract public infrastructure early, when private investment lead public investment. Keywords: Public investment, Private investment, crowding-in-out hypothesis, PVAR DOI : 10.7176/JESD/10-12-02 Publication date :June 30 th 2019

Highlights

Empirical literature is divided on the directional effect of public investment on private investment (Aschauer, 1989a, 1990; Munnell, 1990; Deverajan, Easterly & Pack, 1999; Asante, 2000; Erden & Holcombe, 2005; Ghura & Barry, 2010; Ajide & Olukemi, 2012; Munthali, 2012)
While some studies point to a crowdingin effects of public investment on private investment (Asante, 2000; Ghura & Barry, 2010; Altin, Moisiu & Agim, 2012) others claim public investment crowds-out private investment (Ajide & Olukemi, 2012; Munthali, 2012; Tchouassi & Ngangue, 2014)
A panel-data vector autoregression (PVAR) approach introduced by Holtz-Eakin, Newey and Rosen (1988) has the ability to simultaneously estimate a system of equations like the one specified in equations 2, 3 and 4 below

Summary

Introduction

Empirical literature is divided on the directional effect of public investment on private investment (Aschauer, 1989a, 1990; Munnell, 1990; Deverajan, Easterly & Pack, 1999; Asante, 2000; Erden & Holcombe, 2005; Ghura & Barry, 2010; Ajide & Olukemi, 2012; Munthali, 2012). While some studies point to a crowdingin effects of public investment on private investment (Asante, 2000; Ghura & Barry, 2010; Altin, Moisiu & Agim, 2012) others claim public investment crowds-out private investment (Ajide & Olukemi, 2012; Munthali, 2012; Tchouassi & Ngangue, 2014) This dichotomy appears to be related to the stage of development of the economy of study (Belloc & Vertola, 2004; Erden & Holcombe, 2005; Munthali, 2008, 2012) and the type of government spending (Malizard, 2015). Through orthogonalizing, we are able to achieve our interest of ascertaining the effect of one shock at a time while holding other shocks constant (Love & Zicchino, 2006)

Methods

Conclusion