Determinants in the Composition of Investment and Structures in Uganda

Using a unique data set that disaggregates equipment and structure components of capital formation, the paper examines how investment could respond to changing macroeconomic events. To do this, a stylized analysis of the performance of investment in equipment and structures over the period 1981/82 to 2005/2006 is presented. The findings show that the private investment component was sensitive to changes in relative prices. The analysis does not adequately support the existence of a low elasticity of substitution between the structure and equipment components of aggregate investment, as theory would suggest. However, when the data are disaggregated between public and private investment, a more plausible result is obtained in which the elasticity of substitution is somewhat higher for the private sector and correspondingly lower for the public sector. There is also evidence that higher risk in the economy tended to discourage long-term commitment to structures. Increases in aid flow led to a rise in the price of structures (with a large non-tradable investment good component) relative to that of equipment. The increase in structures prices was, therefore, consistent with propositions in boom sector literature. In particular, increased aid flow tended to positively impact on investment in structures relative to equipment, which is consistent with the observed significant levels of donor resources channelled by the government towards social infrastructure projects