This study attempts to investigate the effect of government expenditure on private investment in Ethiopia over the period 1980-2012. The central question of this study is weather government expenditure has a positive or crowding in effect (complementary hypothesis) or a negative or crowding out effect (the substitutability hypothesis )on private investment in Ethiopia. To achieve its objective it adopted a modified flexible accelerator model to enlighten on the economic relationship between private investment and the other variables and used the modern technique of vector auto regressive model (VAR) and vector error correction model(VECM)as its methodology. The study also used the Johansen-Juselius (1990) cointegration analysis of a multivariate system of equation to estimate the long run relationship between government expenditure and private investment to determine the order of integration of the variable and Granger-Causality test was undertaken to determine causal relationship between the variables. In addition to this the study employs the Augmented Dicky-Fuller (ADF) unit root test and phillip perron test. The statistical tests reveal that all-time series data are non-stationary in their level and they become stationary after diffrencing.i.e.they are integrated of order one I(1).The johansen-juselius cointegration test shows that the series are cointegrated and then employs the vector error correction model moreover the study applies the impulse response function (IRF)and forecast error variance decomposition (FEVD) to investigate the effect of government investment shocks on private investment. And the empirical findings support the complementary hypothesis between government capital expenditure and private investment and that tends to crowd-in private investment in Ethiopia. And the empirical finding of recurrent part of government expenditure shows a mixed effect of complementary hypothesis and substitutability hypothesis which tends to crowd-in and crowd out effect .Thus government expenditure have a positive as well as negative effect on private investment and finally the study is used CHOW test in order to know whether structural break has an effect on private investment or not and the result depict that there is a structural break that have a positive effect on private investment of Ethiopia.
Keyword: Government expenditure, private investment, VAR, crowding-In, crowding out, Ethiopia
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1. Back ground of the Study
1.2. Statement of the Problem
1.3. Research Questions
1.4. Objective of the Study
1.5. Significance of the study
1.6. Limitation and Scope of the Study
CHAPTER TWO: RESEARCH METHODOLOGY
2.1. Research Design
2.2. Data Type and Source
2.3. Method of data analysis
2.3.1. Descriptive Analysis
2.3.2. Econometrics Analysis
2. 4. Definition and Measurement of Variables
2.5. Theoretical Framework for econometric model specification
2.6. Econometric Model specification
2.7. Time series properties
2.7.1. Stationary Tests
2.7.2. Phillips-Perron (PP) test
2.7.3. Cointegration test
2.7.4. Granger Causality Test
2.8. Estimation Techniques
2.8.1. Vector Auto-Regression (VAR) analysis
2.8.2. Impulse Response Analysis
2.8.3. Variance Decomposition
2.8.4. The Error-Correction Model
2.9. Chow Test for Structural Stability
CHAPTER THREE: RESULT AND DISCUSSION
3.1. Descriptive Analysis
3.1.1 Total Government expenditure and growth in Ethiopia
3.1.2. Composition of public expenditure in Ethiopia
3.1.3. Distribution of Government Expenditure
3.1.4. Sectorial composition of public expenditure in Ethiopia
3.1.5. Financing of Government Expenditure
3.1.6. Government budget deficit and means of financing
3.1.7. Trends of private Investment in Ethiopia
3.1.8. Investment during Derg period
3.1.9. Investment during post Derg period
3.1.10. Gross domestic savings and investment in Ethiopia
3.2 Econometrics Analysis
3.2.1Augmented Dicky-Fuller test
3.2.2. Phillips-Perron (PP) test
3.2.3 Cointegration Analysis
3.2.4 Coitegration (Long run estimation)
3.2.5 Granger-causality test
3.2.6 VAR Estimation and Diagnostic Tests
3.2.7 Regressions Estimation and Diagnostic Tests
3.2.8 The short run error correction result of private investment
3.3 The Effect of Government Expenditure on Private Investment
3.4. The Effect of Recurrent Expenditure on Private Investment
3.5. The Effect of Budget Deficit on Private Investment
3.6. The Effect of Domestic credit to private sector on Private Investment
3.7. Forecast Error Variance Decomposition Analysis (FEVD)
3.8. Impulse response Function
3.9. Chow test result
CHAPTER FOUR: SUMMARY, CONCLUSION AND POLICY IMPLICATION
4.1 Summary
4.2. Conclusion
4.3 Recommendation
4.4 Policy Implications
4.5 Areas for Further Research
Research Objectives and Themes
This thesis aims to investigate the impact of government expenditure on private investment in Ethiopia from 1980 to 2012, specifically addressing whether government spending acts as a complementary ("crowding-in") or substitutive ("crowding-out") force. Using a Vector Auto-Regression (VAR) and Vector Error Correction Model (VECM), the study analyzes the long-run and short-run relationships between various fiscal components and private investment.
- The influence of disaggregated government expenditure on private investment.
- The impact of budget deficits and domestic credit to the private sector.
- Comparative analysis of government spending under the Derg and post-Derg regimes.
- Use of cointegration analysis and Granger-causality tests to determine causal dynamics.
- Evaluation of structural breaks, particularly the 1992 structural adjustment program.
Excerpt from the Book
1.1. Back ground of the Study
The interest of economists in the relationship between government spending and private investment is motivated mainly by the controversy over the crowding out or crowding in effect of government spending on private investment. With the renewed interest in the role of the private sector as an engine of economic growth, the examination of this relationship is given further impetus. The idea of a private sector led economic growth in Ethiopia is therefore traceable to the observed success of the major industrialized countries; which attributed to the resilience of their organized private sector (Nasir & Muhammad, 2009).
As a result of the poor performance of the economy over the period in which government played the leading role in the economy, there was a change in the expected role of the government. To this end, market oriented structural reform programs such as privatization and deregulation were adopted to ensure a reduction in the role of government in the economy. The guiding principle in this redefined role of government was that government should concentrate its resources in areas that compliments rather than crowd-out private sector investment, thereby creating an enabling environment for the private sector investment (Nasir & Muhammad, 2009).
Some economists have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. Thus, government expenditure, even a recurrent nature, can contribute particularly to private investment and economic growth. On the other hand, endogenous growth models like Barro predict that only those productive government expenditures will positively affect the long run growth rate (Barro, 1990).
Summary of Chapters
CHAPTER ONE: INTRODUCTION: This chapter introduces the controversy regarding the crowding-in/out effects of government spending and outlines the research objectives, specific questions, and the significance of studying the Ethiopian context.
CHAPTER TWO: RESEARCH METHODOLOGY: This chapter details the quantitative approach, describing the Vector Auto-Regression (VAR) and VECM models, data sources, and the time-series property tests (ADF and PP) used to ensure model validity.
CHAPTER THREE: RESULT AND DISCUSSION: This chapter provides an empirical analysis of government expenditure, budget deficits, and investment trends, presenting econometric results including cointegration, Granger-causality, and the effects of specific fiscal shocks.
CHAPTER FOUR: SUMMARY, CONCLUSION AND POLICY IMPLICATION: This chapter synthesizes the empirical findings, concludes on the relationship between fiscal policy and investment, and provides policy recommendations for the Ethiopian government.
Keywords
Government expenditure, private investment, VAR, VECM, crowding-in, crowding-out, Ethiopia, budget deficit, structural adjustment program, cointegration, Granger-causality, fiscal policy, economic growth, domestic credit, macroeconomic stability.
Frequently Asked Questions
What is the core focus of this research?
The study investigates how different categories of government expenditure influence private investment in Ethiopia over the 1980–2012 period.
What are the primary themes covered?
Key themes include the crowding-in/out debate, the effects of capital versus recurrent expenditure, the impact of budget deficits, and the role of domestic credit to the private sector.
What is the main research question?
The central question is whether government expenditure in Ethiopia stimulates private investment (complementary hypothesis) or hinders it (substitutability hypothesis).
What scientific methods are utilized?
The study employs a modified flexible accelerator model, Vector Auto-Regression (VAR), Vector Error Correction Model (VECM), and Johansen cointegration analysis.
What is analyzed in the main body?
The main body evaluates descriptive trends, formal unit root and cointegration tests, and provides econometric estimates for short-run and long-run relationships.
Which keywords characterize this thesis?
Essential keywords are Government expenditure, private investment, VAR, crowding-in, crowding-out, and Ethiopia.
Does the 1992 structural adjustment program impact the findings?
Yes, the study uses dummy variables and a Chow test to account for the structural break caused by the 1992 reforms, finding a positive influence on private investment.
How does the study conclude regarding recurrent expenditure?
The research finds that recurrent expenditure has a mixed effect, but leans towards promoting private investment through its contribution to human capital, such as health and education.
- Citar trabajo
- Frew Hailu (Autor), 2014, Assessement of the effect of government expenditure on privat investment in Ethiopia, Múnich, GRIN Verlag, https://www.grin.com/document/282156
