Financial Liberalisation and Investment in Tanzania: An Empirical Investigation

Abstract

This study attempts to empirically examine the impact of financial liberalisation on investment in Tanzania using the cointegration based error-correction model. The study seeks to answer one critical question: Is the mechanism through which financial liberalisation affects economic growth in Tanzania based upon its impact on the volume or on the efficiency of investment? The empirical results of this study reveal that whilst financial liberalisation positively influences the volume of investment in Tanzania, its impact on the efficiency of investment is minimal. The study, therefore, concludes that the current financial liberalisation taking place in Tanzania may only impact on economic growth through its influence on the volume rather than the efficiency of investment. Other empirical results reveal that: 1) Public investment complements rather than substitutes private investment in Tanzania; 2) The growth rate of real GDP has a positive and significant effect on private investment in Tanzania; and 3) Foreign savings have a negative effect on the efficiency of investment in Tanzania.