Crowding-out: Government & private investment analysis

Abstract

This study examines the crowding-out effect in Albania from 2000 to 2022, specifically investigating the relationship between government investment (GI) and private investment (PI). Using time series data for gross domestic product (GDP), GI, PI, and real interest rates (RI), we applied the Johansen cointegration test and vector error correction model (VECM) to analyse the long-run and short-run relationships among these variables. Our results indicate a significant long-run correlation between GI and PI, suggesting that increased government investment in Albania leads to reduced private investment, demonstrating the crowding-out effect. Moreover, we observe a positive connection emerges between real interest rates and private investment. Consistent with prior research, Funashima and Ohtsuka (2019) identified both crowding-out and crowding-in effects in Japan, echoing our findings. Similarly, Bedhiye and Singh (2022) noted a negative correlation between government and private investment in developing economies. These findings have critical implications for policymakers, underscoring the potential negative consequences of government investment on private investment and economic growth. Effective policy implementation necessitates a delicate equilibrium between government investment and its potential adverse effects. In summary, this study offers valuable insights into government-private investment interactions in Albania, highlighting the crowding-out effect and the influence of real interest rates. These insights contribute to informed policymaking for sustainable economic growth.