Public Infrastructure Investment, Private Investment and Economic Growth in Ethiopia: Co-Integrated VAR Approach

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Addis Ababa University


This study investigates the relationship between private investment and public infrastructure investment, as well as their relative impact on economic growth in Ethiopia. Moreover, the study carried out through analyzing the impact of the two broad categories of public infrastructure investments: physical and social. In order to achieve the stated objective the private investment and the growth model were estimated separately using cointegrated VAR approach for the period 1974/75-2013/14. The study reveals that physical public infrastructure investment has a crowding-in effect on private investment both in the short run and long-run. On the other hand, social public infrastructure investment is found to deleteriously impacted private investment in the long run while in the short-run it has insignificant impact, implying that the crowding out impact of social public infrastructure investment have been large enough to offset any crowding-in effects in the long-run. Moreover, the study shows the significant and positive impact of output growth in stimulating private investment both in the short-run and long-run. The contribution of physical public infrastructure investment to the real GDP is positive and significant in the long-run while it has a significant negative impact in the short run. In the long run, social public infrastructure investment exerts negative and significant effect on economic growth while in the short run it has insignificant impact. Finally, as a policy implication, it will be natural to think of supplementary reforms so as to tackle the negative impact of social public infrastructure investment on private investment and economic growth.



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