THE EFFECTS OF PUBLIC INVESTMENT ON PRIVATE INVESTMENT IN DEVELOPING ECONOMIES


ERDEN L. , Holcombe R. G.

PUBLIC FINANCE REVIEW, vol.33, no.5, pp.575-602, 2005 (Journal Indexed in ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 33 Issue: 5
  • Publication Date: 2005
  • Doi Number: 10.1177/1091142105277627
  • Title of Journal : PUBLIC FINANCE REVIEW
  • Page Numbers: pp.575-602

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.