The Causal Relationship between Private and Public Investment in Zimbabwe

Muyambiri, Brian and Chiwira, Oscar and Enowbi Batuo, Michael and Chiranga, Ngonidzashe (2010): The Causal Relationship between Private and Public Investment in Zimbabwe.

Abstract

The study examines the relationship between private and public investment in Zimbabwe utilizing yearly time series data for the period 1970 to 2007. Emphasis is placed on the direction of causality and the effect of the two types of investment on each other. The paper constructs empirical models for both private and public investment, based on the flexible accelerator theory. Private investment is found to be cointegrated with public investment. A cointergration approach and VEC model are employed to assess the short run relationship existing between public and private investment. The relationship between private and public investment is found to be insignificant and the direction of causality found to be unidirectional. The results support the notion that private investment precedes public investment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Private Investment, Public Investment, Causality, Flexible Accelerator Theory, Zimbabwe
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Ahmad, I. and Qayyum,A (2008): “Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan”, European Journal of Economics, Finance and Adminstrative Sciences, Issue 11, pp.84-96.

AfDB/OECD Development Centre (2003): “African Economic Outlook 2003: Zimbabwe Country Report”, For a complete text, see the OECD Development Centre website: http://www.oecd.org

AfDB/OECD Development Centre (2004): “African Economic Outlook 2004: Zimbabwe Country Report”, For a complete text, see the OECD Development

Atukeren, E. (2005): “Economic and Institutional Determinants of the Crowding-in Effects of Public Investments in Developing Countries”, Swiss Institute for Business Cycle Research, Zurich, Switzerland.

Beddies, C. (1999): “Investment, Capital Accumulation and Growth: Some Evidence from Gambia: 1964-1998”, IMF Working Paper 1999/117.

Bernanke, B.S. (1983): “Irreversibility, Uncertainty and Cyclical Investment”, Quarterly Journal of Economics, Volume 98, pp. 85-106.

Bertola, G., and Caballero, R. J. (1994): “Irreversibility and Aggregate Investment”, Review of Economic Studies, Volume 61, No.2, pp. 223-246.

Blanchard, O.J. (1987): “Vector Autoregressions and Reality-Comment”, Journal of Business and Economics Statistics, Volume 5, No. 4, pp. 449-451.

Box, G.E.P. and Jenkins, G.M. (1970): “Time Series Analysis: Forecasting and Control”, Holden-Day, San Francisco.

Caballero, R. J. (1991): “On the Sign of the Investment-Uncertainty Relationship”, American Economic Review, 81(1), pp. 279-288

Caballero, R. J. (1993): “On the Dynamics of Aggregate Investment” in Striving for Growth after Adjustment: The Role of Capital Formation”, Serven, L. and Solimano, (Eds.), Washington DC (World Bank) pp. 81-106.

Carruth, A., Dickerson, A. and Henley, A. (1998): “Econometric Modelling Of UK Aggregate Investment: The Role of Profits and Uncertainty”, University of Kent, Studies in Economics, Canterbury

Central Statistical Office (several issues): “Quarterly Digest of Statistics” (several issues), Harare.

Central Statistical Office (several issues): “Monthly Digest of Statistics” (several issues), Harare.

Chhibber, A. and Wijnbergen, S.V. (1988): “Public Policy and Private Investment in Turkey”, World Bank Working Paper Series, 27.

Clark, J.M. (1917): “Business Acceleration and the Law of Demand: A Technical Factor in Economic Cycles”, Journal of Political Economics, 25(1), pp. 217-35

Collier, P and Pattillo, C. (1997): “Private Investment, Risk and the Policy Environment in Africa”, African Development Bank, Economic Research Papers No.29.

Coutinho, R. and Gallo, G (1991): “Do Public and Private Investment Stand in Each Other’s Way”, WDR Background Paper, World Bank.

Dailami, M. and Walton, M. (1989): “Private Investment, Government Policy and Foreign Capital in Zimbabwe”, World Bank PRE Working Paper No. 428

Dehn, J. (2000): “Private Investment in Developing Countries: The Effects of Commodity Shocks and Uncertainty”, University of Oxford, Centre for the Study of African Economies, WPS/2000-11.

Dixit, A. and Pindyck, R. (1994): “Investment under Uncertainty”, Princeton Univ. Press, Princeton.

Driver, C and Moreton, D (1992): “Investment, Expectations and Uncertainty”, Blackwell, United Kingdom, pp4-7.

Duncan, R., S. Cuthbertson, and M. Bosworth (1999): “Pursuing Economic Reform in the Pacific”, Pacific Studies Series No.18, Asian Development Bank, Manila.

Easterly, W. and R. Levine (1997): “Africa’s Growth Tragedy: Policies and Ethnic Divisions”, Quarterly Journal of Economics, 112, pp.1203-50

Enders (1995): “Applied Econometrics Time Series”, John Wiley and Sons.

Engle, R. and Granger C. (1987): “Co-integration and Error Correction: Representation, Estimation and Testing”, Econometrica, Volume 55, No 2, pp. 251-276.

Erden, L. and Holcombe, R. G. (2005): “The Effects of Public Investment on Private Investment in Developing Economies”, Public Finance Review, Vol. 33, No. 5, 575-602

Fafchamps, M., Gunning, J.W. and Oosterndorp, R. (1998): “Inventories, Liquidity and Contractual Risk in African Manufacturing”, Department of Economics, Stanford University, mimeo.

Fielding, D. (1994): “Price Instability and Investment: Evidence from Africa”, CREDIT Research Paper No94/8 Ghura, D. and T. Hadjimichael (1996): “Growth in Sub-Saharan Africa”, Staff Papers, International Monetary Fund, 43, September.

Ghura, D. (1997): “Private Investment and Endogenous Growth: Evidence from Cameroon”, IMF Working Paper 97/165, December.

Government of Zimbabwe (1986): “First Five-Year National Development Plan”, Harare.

Government of Zimbabwe (1990): “Framework for Economic Reform 1991–1995”, Harare.

Government of Zimbabwe (1980–1982/83): “Transitional National Development Plan”, Harare.

Granger, C.W.J (1969): “Investigating Causal Relations by Econometric Models and Cross-Special Methods”, Econometrica, pp. 424-438.

Granger, C.W.J. and Newbold, P. (1974): “Spurious Regressions in Econometrics”, Journal of Econometrics, Volume 2, pp. 111-120.

Granger, C.W.J (2004): “Time Series Analysis, Cointegration, and Applications”, The American Economic Review, Volume 94, No. 3, pp. 421-425

Gujarati, N.D. (1995): “Basic Econometrics”, 3rd Edition, McGraw-Hill, New York

Hadjimichael, M., Ghura, D., Muhleisen, M., Nord, R., and Ucer, E.M. (1995): “Sub-Saharan Africa: Growth, Savings and Investment,1986-93”,IMF Occasional Paper No.118 Hartman, R. (1972): “The Effects of Price and Cost Uncertainty on Investment”, Journal of Economic Theory, Volume 5, pp. 258-266.

Hasset, A.K. and Metcalf, E.G (1999): Investment with Uncertain Tax Policy: Does Random Tax Policy discourage Investment”, The Economic Journal, Volume 109, No 457, pp372-393

Hernandez-Cata, E. (2000). “Raising Growth and Investment in Sub-Saharan Africa: What can be done?”, Policy Discussion Paper: PDP/00/4, IMF, Washington, D.C. International Monetary Fund (2006): “International Financial Statistics: Database and Browser October 2006”, IMF Publications Services, Washington, D.C.

Jayaraman, T.K. (1996): “Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis”, Occasional Paper No.14, Asian Development Bank, Manila.

Jenkins. C (1998): “Determinants of Private Investment in Zimbabwe”, Journal Of African Economies, Volume 7, No. 1, pp. 34-61, University of Oxford, UK

Johansen, S (1991): “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models”, Econometrica, Vol. 59, pp. 1551–1580.

Johansen, S (1995): “Likelihood-based Inference in Cointegrated Vector Autoregressive Models”, Oxford University Press.

Johansen, S and Juselius, K (1990): “Maximum Likelihood Estimation and Inferences on Cointegration—with applications to the Demand for Money”, Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169–210.

Jorgenson, D.W. (1971): Econometric Studies of Investment Behaviour: A Survey”, Journal of Economic Literature, Volume 9, No. 4, pp. 1111-1147

Kahn, M. S., and Reinhart, C. M. (1990): “Private Investment and Economic Growth in Developing Countries”, World Development, Vol. 18, No. 1, pp. 19-27.

Kahn, M. S., and Kumar, M. S. (1997): “Public and Private Investment and The Growth Process in Developing Countries”, Oxford Bulletin of Economics and Statistics, Vol. 59, No. 1, pp. 69-88.

Leahy, J. and Whited, T. (1996): “The Effect of Uncertainty on Investment: Some Stylized Facts”, Journal of Money Credit and Banking, pp. 64-93.

Lee, K.S. and Anas, A. (1991): “Manufacturers’ Responses to Infrastructure Deficiencies in Nigeria: Private Alternatives and Policy Options”, in Economic Reform in Africa, Chibber, A. and Fischer,S. (eds). World Bank, Washington D.C.

Levacic, R. and Rebmann, A. (1982): “MACROECONOMICS An Introduction to Keynesian-Neoclassical Controversies”, 2nd Edition, Macmillan, London.

Lipsey, R.G and Chrystal, K.A (1997): “An Introduction to Positive Economics”, 8th Edition, Oxford University Press, London.

MacDonald, R. and Siegel, D.R. (1986): “Investment and the valuation of firms when there is an option to shut down”, International Economic Review, Volume 26, No. 2, pp. 331-49.

Mataya, S.C. and Veeman, M.M. (1996): “The Behaviour of Private and Public Investment in Malawi”, The Canadian Journal of Economics, Vol. 29, pp. S438-S442.

Mensah, Y. (2006): “Understanding Economic Reforms in Africa, A Tale of Seven Nations”, Palgrave, Macmillan.

Ncube, M. (1999): “Is Capital Important for Economic Growth in Zimbabwe?”, AJEP, Volume 6, No. 2.

Ndikumana, L. (2000): “Financial Determinants of Domestic Investment in Sub-Saharan Africa”, World Development, Volume 28, pp.381-400.

Ndovorwi, B. E. (1997): “Public Policy and Private Investment in Zimbabwe”, dissertation, Department of Economics, University of Zimbabwe, Harare.

Oshikoya, T.W. (1994): “Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis”, Journal of Development Studies, pages 573-596.

Ouattara, B. (2004): “Modelling the Long Run Determinants of Private Investment in Senegal”, CREDIT Research Paper, No. 04/05.

Park, J.Y. and Phillips, P.C.B. (1989): “Statistical Inference in Regressions with Integrated Processes: Part 2”, Econometric Theory, pp. 95-131

Pattillo, C. (1996): “The Effects of Regime Switching Uncertainty on Irreversible Investment Decisions”, Centre for the Study of African Economies Working Paper, No. 96-9

Pereira, A. M. (2001): “On the Effects of Public Investment on Private Investment: What Crowds in What?”, Public Finance Review, Vol. 29, No. 1, pp. 3-25.

Pindyck, R. and Solimano, A. (1993): “Economic Instability and Aggregate Investment”¸ NBER Working Paper, No.791.

Pradhan, S. (1996): “Evaluating Public Spending”, World Bank Discussion Paper 323, Washington D.C.

Quarterly Economic and Statistical Review (various years). Reserve Bank of Zimbabwe (RBZ), Harare.

Rama, M. (1990): “Empirical Investment Equations in Developing Countries”, PRE Working Paper 563, World Bank.

Ramirez, D.M. (1994): “Public and Private Investment in Mexico, 1950-1990: An Empirical Analysis”, Southern Economic Journal, Vol.61, pp.1-17.

Reinikka, R. and Svensson, J. (1998): “Investment Response to Structural Reforms and Remaining Constraints: Firm Survey Evidence from Uganda”, World Bank, Africa region, mimeo.

Rodrik, D. (1991): “Policy Uncertainty and Private Investment in Developing Countries”, Journal of Development Economics 36, pp. 229-242

Rossiter, R. (2002): “Structural Cointegration Analysis of Private and Public Investment”, International Journal of Business and Economics, Volume 1, No. 1, pp. 59-67.

Seruvatu, E. and Jayaraman, T. K (2001): “Determinants of Private Investment in Fiji”, Reserve Bank of Fiji, Working Paper 2000-2001

Serven, L. (1998): “Macroeconomic Uncertainty and Private Investment in LDCs: An Empirical Investigation”, Mimeo, World Bank.

Stock, J.H. and Watson, M.W. (1988): “Variable Trends in Economic Time Series”, Journal of Economic Perspectives Volume 2, pp147-74.

World Bank (2001): “African Development Indicators 2001”, World Bank Africa Database, Washington, D.C.

World Bank (1996): “African Development Indicators 1996”, World Bank Africa Database, Washington, D.C.

Whiteside, A. W. (Ed) (1989): “Industrialisation and Investment Incentives in Southern Africa, (1989)”, Pietermaritzburg, University of Natal Press.

Zwizwai. B, Kambudzi. A and Mauwa. B (2004): “Zimbabwe: Economic Policy-Making and Implementation: A Study of Strategic Trade and Selective Industrial Policies” in The Politics of Trade and Industrial Policy in Africa: Forced Consensus?,eds Charles Soludo, Osita Ogbu, and Ha-Joon Chang, Africa World Press/IDRC (2004), pp 376.