Private Investment and Economic growth Evidence from Ethiopia

Abstract

This study attempts to evaluate the inter-relationship among two macro variables, namely private investment and GDP growth both in the long and short run with reference to Ethiopian economy using a data set of 1970-2011. I try to pinpoint the important determinants of each variable, using the standard econometric techniques. Long run relationship between variables is specified by using method proposed by Johansen and Juselious (1990).Based on the results of the long-run co-integration tests parameters short correction model is used to estimate the short run relationship between the variables. As expected, growth has a strong positive relationship with public and private investment; there is evidence of uni directional causality between real GDP, and private investment. A general negative theoretical relationship between public and private investment is confirmed in the context of Ethiopian economy, i.e. public investment has a ―crowding-out‖ effect on private investment at large. This is because public investment has primarily been financed in the past through internal and external borrowing. The government revenues collected through taxation has little contribution in promoting public investment. Overall, the major policy implication of this study is that, given the long run positive impact private investment and public investment on economic growth, it will be natural to think of supplementary reforms.