Public investment and private capital formation in uganda (1983-2010)

Abstract

Literature on the impact of public investment on private investment in developing countries gives inconsistent results on whether it compliments or crowds out private investment. Yet the relationship between public investment and private investment is intuitive for informing public policy on the direction of public investment. Using time series data for the period 1983-2010, the impact of public investment on private capital formation is investigated along with other macroeconomic variables that determine private investment. A VAR is estimated by means of regression analysis based on cointegration and the Error Correction Model (ECM) of Engle and Granger (1987) and Johansen and Juselius (1990).

Econometric results of the study indicate existence of a short-run dynamic adjustment and the long run equilibrium relationship between the estimated variables and private investment. Credit to the private sector and GDP growth indicate a positive relationship while public investment, inflation and external debt are inversely related to private investment in both the short-run and the long-run. A significant error correction term further confirms existence of cointegration among the estimated variables and private capital formation.

As a matter of policy, government should discourage investment in sectors that compete with the private sector and reduce on consumption expenditure. Expenditure on non-productive sectors like the military should be reduced while development expenditure should be increased. There is need to establish policies that will ensure availability of affordable credit to the private sector and strategies should be put in place to reduce on the external debt. Inflation should be kept within manageable limits at least below 10% to ensure that investors’ confidence is not eroded.