Effect of Public Investment on Private Investment in Case of Ethiopia (original) (raw)

This study has examined the effect of public investment on private investment in Ethiopia during 1993 to 2018. It also examined their relative contribution to economic growth. The study employed the ARDL bounds testing approach which is initiated by Pesaran & Shin (1999) and later popularized by Pesaran et al., (2001). The empirical results reveal that public investment has a crowding-in effect on private investment in the long run which means, public investment stimulates private investment in the long run. In the short run, however, public investment has a crowding-out effect on private investment. In the other case, public investment has no direct impact on economic growth in the long run. However, private investment has a significant positive impact on economic growth in the long run while it is negatively related to economic growth in the short run. This suggests that private investment positively contributes to economic growth more than public investment. In addition, economic growth is positively associated with private investment although it is statistically insignificant in the long run. This implies that there is a unidirectional effect, which means private investment could affect economic growth while it is not vice versa.