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The Effects of Public Investment on Private Investment in Developing Economies

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Author Info

  • Lutfi Erden

    (Hacettepe University)

  • Randall G. Holcombe

    (Florida State University)

Abstract

The literature on the impact of public investment in developing economies gives inconsistent results on whether it complements or crowds out private investment. Applying several pooled specifications of a standard investment model to a panel of developing economies for 1980 to 1997, this study finds that public investment complements private investment, and that, on average, a 10 percent increase in public investment is associated with a 2 percent increase in private investment. The results also indicate that private investment is constrained by the availability of bank credit in developing economies. The same empirical models are run on a panel of developed economies. In contrast to developing economies, public investment crowds out private investment in developed economies. The results show that in a number of important ways, private investment in developed economies is influenced by different factors than private investment in developing economies.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 33 (2005)
Issue (Month): 5 (September)
Pages: 575-602

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Handle: RePEc:sae:pubfin:v:33:y:2005:i:5:p:575-602

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Related research

Keywords: developing economies; investment; capital markets; credit; public expenditure;

References

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  1. Reinhart, Carmen & Khan, Mohsin, 1989. "Private investment and economic growth in developing countries," MPRA Paper 13655, University Library of Munich, Germany.
  2. Guncavdi, Oner & Bleaney, Michael & McKay, Andrew, 1998. "Financial liberalisation and private investment: evidence from Turkey," Journal of Development Economics, Elsevier, vol. 57(2), pages 443-455.
  3. Nader Nazmi & Miguel D. Ramirez, 1997. "Public And Private Investment And Economic Growth In Mexico," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 65-75, 01.
  4. James D. Gwartney & Robert A. Lawson & Randall G. Holcombe, 1999. "Economic Freedom and the Environment for Economic Growth," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(4), pages 643-, December.
  5. Scully, Gerald W & Slottje, Daniel J, 1991. " Ranking Economic Liberty across Countries," Public Choice, Springer, vol. 69(2), pages 121-52, February.
  6. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  7. Salmon, Mark H, 1982. "Error Correction Mechanisms," Economic Journal, Royal Economic Society, vol. 92(367), pages 615-29, September.
  8. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  9. Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  10. M. O. Odedokun, 1997. "Relative effects of public versus private investment spending on economic efficiency and growth in developing countries," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1325-1336.
  11. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
  12. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  13. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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Citations

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Cited by:
  1. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," Research Department Publications 4597, Inter-American Development Bank, Research Department.
  2. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, vol. 106(2), pages 133-152, June.
  3. Misati, Roseline Nyakerario & Nyamongo, Esman Morekwa, 2011. "Financial development and private investment in Sub-Saharan Africa," Journal of Economics and Business, Elsevier, vol. 63(2), pages 139-151, March.
  4. Borko Handjiski, 2009. "Investment Matters : The Role and Patterns of Investment in Southeast Europe," World Bank Publications, The World Bank, number 5920, October.
  5. Sakib Mahmud & Gazi Mainul Hassan, 2014. "Consequences of Public Programs and Private Transfers on Household Investment in Storm Protection," Working Papers in Economics 14/01, University of Waikato, Department of Economics.
  6. Mogues, Tewodaj & Yu, Bingxin & Fan, Shenggen & Mcbride, Linden, 2012. "The impacts of public investment in and for agriculture: Synthesis of the existing evidence," IFPRI discussion papers 1217, International Food Policy Research Institute (IFPRI).
  7. Sallahuddin Hassan & Zalila Othman & Mohd Zaini Abd Karim, 2011. "Private and Public Investment in Malaysia: A Panel Time-Series Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 199-210.
  8. Ramirez, Miguel D., 2007. "Is Foreign Direct Investment Productive in the Latin America Case? A Panel Unit Root and Panel Cointegration Analysis, 1980-2001," Working Papers 23, Yale University, Department of Economics.
  9. Yilmaz Akyuz, 2006. "From Liberalization To Investment and Jobs: Lost in Translation," Working Papers 2006/3, Turkish Economic Association.
  10. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.
  11. Akyüz, Yilmaz, 2006. "From liberalization to investment and jobs : lost in translation," ILO Working Papers 391320, International Labour Organization.
  12. Chiara Del Bo & Massimo Florio & Silvia Vignetti & Emanuela Sirtori, 2011. "Additionality and regional development: are EU Structural Funds complements or substitutes of national Public Finance?," Working Papers 201101, Centre for Industrial Studies (CSIL).

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