The Nexuses Between Private Investment, Public Investment And Economic Growth In Ethiopia: Using Var Approach

Abstract

The study was conducted to examine the nexuses between public investment, private investment, and economic growth in Ethiopia. A time series secondary data covering 1981-2020 periods with a source from World Bank and world database was utilized. Vector Autoregressive approach was employed to investigate the relationship between private investment, public investment and economic growth. From the descriptive analyses, the trends of Ethiopian investment shows that the investment rate in Ethiopia doubled from about 18% of Gross Domestic product in the second half of the 1990s to about 33% of Gross Domestic product in 2020. Most of this change is attributed to a steady increase in public investment from about 5% of Gross Domestic product in 1992-93 to 13% in 2020. From econometric analysis, Wald Test result revealed that Real Public Investment and Real Private Investment are jointly has a relationship with Real growth rate. The short-run impact of public investment on economic growth is found to be negative and statistically significant, where the negative sign of public investment is indicative of a crowding out effect on growth in the short run. Other variables like private investment, active labor force and broad money supply effect on economic growth are found to be positive and statistically significant in the short run model. From the result of VAR Long Run Estimation, impact of real public investment and real private investment on economic growth is found to be positive and statistically significant. From result of Granger Causality test, there exists a uni - directional causality from Real Public Investment to Real Gross Domestic Product or from Public Investment to Economic Growth. To encourage private firms to undertake the project quickly, the government should adopt introduce public incentives such as tax reductions or a subsidizing policy. Ethiopian government and policy makers should plan an economic growth strategy that encourages government investment to invest more in order to achieve sustainable economic growth. The planned public investment must be considering the country prioritize macro and micro economic policies and strategies to improve the aggregate gross domestic product of the country.