The Determinants of Private Investment and the Relationship between Public and Private Investment in Pakistan

Majeed, Muhammad Tariq and Khan, Saniya (2008): The Determinants of Private Investment and the Relationship between Public and Private Investment in Pakistan. Published in: NUST Journal of Business and Economics , Vol. 1, No. 1 (2008): pp. 41-48.

Abstract

This paper analyzes the factors that play an important role in determining private investment in Pakistan using annual data for the period 1970-2006. The econometric tests undertaken support the view that private sector output, net capital inflows to the private sector, total sources of funds and past capital stock have all been significant determinants of private investment rates, while changes in the volume of bank credit also has a positive effect. The empirical evidence suggests that if the sector is squeezed for credit then there will be a reduction in the level of private investment with adverse impacts on the long-term productive capacity of the private sector. The results suggest that overall relationship of public and private investment is one of substitutability. It means there is a “crowding out” effect indicating that most of the physical and financial resources are utilized by public sector, thereby exerts a negative influence on private investment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Private Investment; Public Investment; Crowding out
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock

References

Agosin, M. (1995), “Savings and Investment in Latin America”, UNCTAD Review: 155-175.

Atukeren, E. (2005), “Interactions between Public and Private Investment; Evidence from Developing Countries”, KYKLOS, 58(3): 307-330.

Blejer, M. I. and M. S. Khan (1984), “Government Policy and Private Investment in Developing Countries”, IMF Staff Papers, 31(2): 379-403.

Chenery, H.B. (1952), “Over capacity and the Acceleration Principle”, Econometrica, 20: 1-28.

Erden, L. and Randall G. Holcombe (2005), “The Effects of Public Investment on Private investment in Developing Economies”, Public Finance Review, 33(5): 575-602.

Everhart S. and M. A. Sumlinski (2001), “Trends in Private Investment in Developing Countries: Statistics for 1970-2000 and the Impact of Private investment on Corruption and the Quality of Public Investment”, World Bank, IFC Discussion Paper no.44.

Glen, T. and Sumlinski, M. (1995), “Trends in Private Investment in Developing Countries”, Discussion Paper No.25, IFC, World Bank.

Greene, J. and Delano Villanueva (1991), “Private Investment in Developing Countries: An Empirical Analysis”, IMF Staff Papers, 38(1): 33-58.

Guimaraes, R. and Olaf Unteroberdoerster (2006), “What’s driving private investment in Malaysia? Aggregate trends and firm-level evidence”, IMF Working Paper 06/190/.

Jorgenson, D.W. (1967), “The Theory of Investment Behavior”, in R. Ferber (ed), Determinants of Investment Behavior, N.B.E.R.

Jorgenson, D.W. (1971), “Econometric Studies of Investment Behavior: A Survey”, Journal of Economic Literature, 9(4).

Khan, Ashfaque H. (1988), “Macroeconomic Policy and Private Investment in Pakistan”, Pakistan Development Review, 27(3): 277-292.

Khan, M.S. and C.M.Reinhardt (1990), “Private Investment and Economic Growth in Developing Countries”, World Development, 8(1): 19-27.

Khan, M.S. and M.S.Kumar (1997), “Public and Private Investment and the Growth Process in Developing Countries”, Oxford Bulletin of Economics and Statistics, 59(1), 0305-9049.

Looney, R. E. (1997), “Infrastructure and Private Investment in Pakistan”, Journal of Asian Economics, 8(3): 393-420.

Majeed M. Tariq and Eatzaz Ahmad (2007). “Exports and FDI in Developing Countries: Theory and Evidence” The Pakistan Development Review, Vol. (46) No.4

Majeed M. Tariq and Eatzaz Ahmad (2008). “Human Capital Development and FDI in Developing Countries” The Journal of Economic Cooperation, Vol. (29) No.3

McKinnon, R. I. (1973), Money and Capital in Economic Development, Washington, D.C.: The Brookings Institution.

Naqvi, Naveed H. (2002) “Crowding-in or Crowding-out? Modeling the Relationship between Public and Private Fixed Capital Formation using Co-integration Analysis: the case of Pakistan 1964-2000”, Pakistan Development Review, 41(3): 255-267.

Oshikoya, T.W. (1994), “Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis”, Economic Development and Cultural Change, 42(3): 573-596. Pargal S (2003), “Regulation and Private Sector Investment in Infrastructure: Evidence from Latin America”, World Bank Policy Research Working Paper 3037.

Sakr, K. (1993), “Determinants of Private Investment in Pakistan”, Washington D.C. IMF Working Paper /93/30.

Sasaki, K. and M. T. Yousaf Khan (2001), “Roles of Public Capital in Pakistan’s Economy: Productivity, Investment and Growth Analysis”, RURDS, 13(2): 143-162. Shaw, E.S. (1973), Financial Deepening in Economic Development. NewYork: Oxford University Press.

Srinivasan, T.N. and N.S.S. Narayana (1977), “Economic Performance since the Third Plan and its Implications for Policy”, Economic and Political Weekly. Annual Number.

Sundararajan, V. and Subhash Thakur (1980), “Public Investment; Crowding Out, and Growth: A Dynamic Model Applied to India and Korea”, Staff Papers, International Monetary Fund (Washington), 27 (December 1980), 814-855.

Tun Wai, U. and C. Wong (1982), “Determinants of Private Investment in Developing Countries”, Journal of Development Studies, 19: 19-36.

Veemon, Michele M. and Charles S. M. (1996), “The Behavior of Private and Public Investment in Malawi”, The Canadian Journal of Economics, Vol.29, Special Issue Part 2: 438-442.