Impact of Public Investment on Private Investment in Sub‐Saharan Africa: Crowding In or Crowding Out?

Abstract

This paper investigates the possible crowding-in or crowding-out effect of public investment on private investment in sub-Saharan Africa. While this relationship has been theoretically and empirically studied in the literature, most studies used traditional panel fixed effects or Generalized Method of Moments estimators which can potentially lead to biased and inconsistent estimates. We employ heterogeneous parameter models, including the Mean Group, the Common Correlated Effects Mean Group Model, and the Augmented Mean Group estimators, to incorporate the possibility of slope heterogeneity and the presence of cross-sectional dependence. Using a large sample of 44 sub-Saharan African countries over the period 1960-2015, we find that on average public investment crowds in private investment in sub-Saharan Africa. We also find that the impact differs between countries and is higher in countries with a strong private sector.

Effect of Public Investment on Private Investment: Evidence from Ethiopia

“…Empirical studies have used various approaches and various time series to investigate the impact of public investment on private investment and in the process of economic growth. In this regard, some studies show positive effects of public investment on private investment often appeared in developing countries or emerging economies (see, (Khan and Reinhart;1990;Khan and Kumar;1997;Erden and Holcombe;Hassan et al;Islam et al;Ouedraogo et al;).…”

“…On the other hand, some other researchers argue that there is no sufficient evidence to conclude on the existing relationship, rather the relationship is economic term's dependent. There may be positive relationship in the short run and negative in long run or vice versa or has insignificant evidence to conclude (see, ((Naqvi and Tsoukis;2003;2015;Canh and Phong;2017;Nguyen and Trinh;Ouedraogo et al;). Furthermore, Member (2015) studied the relationship between private investment and major determinants of private investment in Ethiopia.…”

“…There is also empirically no consensus agreement upon the relationship between the public and private investment and growth process even though voluminous empirical studies appeared in accord. As for the first empirical evidence, many studies in developing countries show evidence that public investment positively affects private investment and as well as economic growth (see, (Khan and Reinhart;1990;Erden and Holcombe;Hassan et al;2015;Ouedraogo et al;). In addition, other studies indicate the existence of the positive relationship (crowding in effect) between public and private investment in the long run equilibrium rather than short run (see, (Canh and Phong;2017;Nguyen and Trinh;).…”

Revisiting Government Expenditure and Private Investment Nexus: An ARDL Approach

“…For example, studies by Nguyen and Trinh (2018) Bouakez et al (2018). However, Sinevičienė (2015) and Ouédraogo, Sawadogo and Sawadogo (2019) found variations among countries in the level of crowding-out and crowding-in effect respectively among Sub-Saharan Africa countries. The degree was much higher in countries with a strong private sector.…”

Investissement Public et Investissement Privé en Afrique Subsaharienne: Rôle de la Qualité Institutionnelle

“…L'étude de la relation entre investissements public et privé a fait l'objet de vérifications empiriques en Afrique depuis les années 1990 (Karun et al, 2020; Ngoma et al, 2019; Oshikoya, 1994; Ouédraogo et al, 2019; Rasmané et al, 2019) et continue de raviver la littérature dans cette région au regard de la divergence des résultats obtenus. Ces vérifications empiriques s'alignent toutefois au débat théorique controversé sur les effets bénéfiques de l'investissement public sur l'investissement privé.…”