Public and Private Investment Analysis in Ethiopia

Abstract There has been a growing evidence of the link between investment and economic growth. But when it is viewed at sector-wise, public and private investment, there has been a debate on the relationship between them. In some countries there was evidence of the crowding out effect of public investment on private investment, while there has been the crowding in evidence in other countries. But for sure, a complementary relationship between the two is preferred for better economic growth.  This study found out the existence of the crowding out effect in the country.  The study also evaluates the macroeconomic determinants of private investment in Ethiopia for the last three and half decades (1975-2010) in a short, medium and long run perspective by means of a regression analysis based on the co-integration and Error Correction Model (ECM) of Engle and Granger (1987) combined with the general to specific methodology and the distributive lag model. Econometric results of the study shows public investment, external debt, gross private consumption level, credit availability to private sectors, output and trade liberalization significantly determine private investment in the long run. The changes in inflation rate, interest rate, gross private consumption, public investment and debt servicing have a negative impact while credit availability, real exchange rate deprecation, output growth rate and domestic savings have a positive effect in the short run. The error correction model estimation showed the existence of a shorter period of adjustment between the short run and the long run dynamics of private investment determinants in Ethiopia. Accordingly, to bring better economic growth in the country redirection of public investment from non-infrastructural sectors to the social over heads is required. An appropriate interest rate policy to boost saving on the one hand and measures to widen and modernize the scope of o credit disbursement to private sectors on the other hand is recommended. Moreover, sound macroeconomic policies to cheek uncertainties, mechanisms to curve luxurious private consumptions as well increasing efforts for debt cancellation and relief   there by to reduce future indebtedness are some of the presumed measures to be taken so as to boost private investment in the country.