IMPACT OF PUBLIC INVESTMENT ON ECONOMIC GROWTH IN VIETNAM A DISSERTATION PAPER Presented to the Faculty of the Graduate Program of the College of Arts and Sciences Central Philippine University, Phili[.]
INTRODUCTION
Background and Rationale of the Study
Public investment, funded by state sovereignty or taxpayer money, is essential for enhancing both economic and social infrastructure, such as roads, railways, welfare, and education This investment significantly boosts national industrial competitiveness and economic development by yielding long-term benefits like increased output, income, employment, and productivity, while also lowering production costs As countries face population growth, aging, and income disparities, the demand for social infrastructure investment has risen However, with limited government financial resources, enhancing the efficiency of public investment has become a priority Given the substantial costs and challenges of halting projects mid-implementation, it is vital to prepare detailed plans and conduct thorough feasibility assessments of public investment projects Ongoing management and evaluation during the project's intermediate phase are crucial to ensure adherence to original plans and to reassess feasibility in changing contexts Additionally, ex-post evaluations are necessary to determine project effectiveness Establishing an integrated evaluation system encompassing ex-ante, intermediate, and ex-post assessments throughout the project life cycle is essential for improving overall public investment management efficiency.
Public investment often leads to reduced savings and capital investment in an economy, posing a significant challenge for low-income countries that prioritize purchasing raw materials over essential infrastructure This misallocation of resources contributes to economic inequality, exacerbated by de-unionization, which increases wage disparities as public investment rises while employment opportunities decline Consequently, the relationship between economic growth and inequality is clear and direct.
Since the implementation of "Doi Moi" in 1990, Vietnam has achieved significant economic growth, averaging 6.66 percent from 1990 to 2016, while maintaining a controlled inflation rate and increasing exports A crucial element of this success is the renovation of public finance policies, as outlined in the Vietnam Public Investment Law of 2014 This law categorizes public investment into key areas, including the development of socio-economic infrastructure, support for governmental and social organizations both domestically and internationally, provision of public services and goods, and investment through public-private partnerships.
Vietnam's economy is increasingly integrating into the global market, with improved fiscal policies that foster trust among international investors Since joining the World Trade Organization (WTO) in 2007 and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2019, Vietnam has committed to reducing tariffs This tax reduction, alongside falling crude oil prices, has led to decreased budget revenues, prompting the government to focus on maintaining essential public spending for social and infrastructure development To support economic growth and enhance competitiveness, it is crucial to improve the investment and business environment The government's role includes providing public goods and services through investments in both technical and social infrastructure Consequently, increasing public investment while ensuring efficiency is vital for attracting private investment and driving economic growth.
There are two opposite trends in public investment research As for the first trend, the research of Khan and Kumar (1997), Ramirez and Nazmi (2003), Bukhari et al
(2007) and Haque (2013) showed positive impacts of public investment on economic growth
Contrary to some findings, various studies indicate that public investment may have negligible or even adverse effects on economic growth, often leading to a crowding-out effect on private investment (Vedder and Gallaway, 1998; Ghani and Din, 2006; Swaby, 2007; Hatano, 2010).
Limited research has been conducted on the Vietnamese context, primarily due to data inconsistency and reliability issues Additionally, there is a lack of studies utilizing the ARDL method to evaluate the effects of public investment on economic growth in Vietnam.
This research explores the impact of public investment in Vietnam, specifically examining whether it positively influences private investment and economic growth Key questions addressed include the current role of public investment in Vietnam and its effects on the nation's economic growth.
Therefore, the author chooses the title: “Impact of public investment on the economic growth of Vietnam” for the topic of the Ph.D thesis majoring in Public
This research evaluates the short-term and long-term effects of public investment on economic growth in Vietnam from 1986 to 2015, employing a quantitative approach for empirical studies and a qualitative analysis for impact assessment It emphasizes the necessity of understanding the role of public investment and its efficiency to propose solutions that enhance its contribution to economic growth, highlighting the importance of this analysis in both practical and theoretical contexts.
The relationship between public investment and economic growth has been a focal point of research over the past two decades, yielding contradictory findings Numerous studies, including those by Barth and Bradley (1987), Easterly & Rebelo (1993), Devarajan et al (1996), and Aschauer (1998, 2000), have examined this connection However, their conclusions vary significantly, presenting opposing views on whether the relationship is positive or negative.
The relationship between public investment and economic growth in Vietnam remains underexplored, with existing studies primarily focusing on the effectiveness of government spending in specific sectors or the crowding-out effect of public investment Additionally, previous research has largely concentrated on the impact of infrastructure investment on economic growth This study aims to fill these gaps by addressing key research questions related to this vital economic connection.
- Does Public investment impact positive or negative or have no impact on economic growth in Vietnam?
- What are the weaknesses in public investment in Vietnam in the last 30 years?
- What are some recommendations for improving the effectiveness of public investment as well as promoting the economic growth?
Therefore, the author through qualitative and quantitative research will seek plausible answers to these questions above and fill the gap of knowledge as well as the method employing.
Objectives of the Study
This research investigates the effects of public investment on Vietnam's economic growth from 1986 to 2015 It also offers solutions to improve the efficiency of public investment, aiming to promote sustainable growth and support Vietnam's economic development in the era of globalization.
This study evaluates the long-term effects of public investment on economic growth in Vietnam from 1986 to 2015, with a specific focus on the decade between 2006 and 2015 The primary objective is to analyze the relationship between public investment and economic growth during this period.
- To assess the impact of public investment for economic growth in Vietnam to find out whether the impact is positive or negative for the period 1986-2015;
- To propose a recommendation to enhance public investment efficiency in order to encourage sustainable growth in public investment and economy of Vietnam
- H1: Public investment have positive impact on economic growth in long - run
- H2: Public investment have positive impact on economic growth in short - run
The Theoretical Framework
The Harrod-Domar growth model, introduced in the 1940s by British economist Roy Harrod and American economist Evsey Domar, emphasizes the importance of the ICOR (Incremental Capital-Output Ratio) in understanding the link between investment and economic growth A low ICOR indicates insufficient investment, while a high ICOR suggests capital inefficiency Central to this model is the production function, a key concept in neoclassical economics that illustrates the relationship between inputs and national output The Cobb-Douglas production function, developed in 1928, specifically highlights the technological relationship between physical capital (K), labor (L), and the resulting output (Y).
Growth models are essential for understanding economic development, primarily divided into two categories: the neoclassical growth model, or exogenous growth model, established by Solow in 1956, and the new growth theory, known as the endogenous growth model, advanced by economists such as Romer, Lucas, Barro, and Rebelo in the late 1980s The significance of economic growth has been recognized globally for decades, with core growth theory emerging in the late 1960s and gaining renewed attention in the mid-1980s Long-run economic growth is increasingly viewed as more crucial than short-term fluctuations, prompting inquiries into the underlying reasons for disparities in GDP among nations, particularly between African and European countries The endogenous growth theory emphasizes that long-run growth rates are determined within the model itself, rather than by external factors, with contributions from researchers like Romer, who integrated resources and development, and others like Aghion, Howitt, Grossman, and Helpman, who focused on research and development in their growth frameworks.
The Solow model, introduced by Robert Solow in 1956, provides a framework for understanding the origins of economic growth through a unique production function that examines the roles of capital, labor, and knowledge over time This model emphasizes the significance of public investment, which directly influences aggregate demand through government spending and affects aggregate supply as a component of production Additionally, public investment generates spillover effects, stimulating private investment and enhancing overall economic growth by attracting further private sector contributions.
Conceptual Framework
This study is grounded in the neoclassical growth model established by Solow in 1957, which utilizes a Cobb-Douglas production function to connect output with input factors and a variable known as total factor productivity.
Where: Y is real aggregate output;
From production function of Cobb-Douglas function, if ignored factor productivity (A), the general production function is as simple rewrite as follows: Y= f(L,K)
Now separate the capital: K= Kg + Kpd + Kpdf
Where: Kg is Public capital (State sector);
Kpd is Domestic Private Capital (Non-State sector);
Kpdf is Foreign Direct Capital (Foreign invested sector)
Then (1) can be rewritten as follows:
Analyzing the connection between public investment and economic growth requires considering additional control variables, including private investment, foreign direct investment (FDI), and the labor force, as illustrated in Figure 1.1.
Control Variables: Private Investment, Foreign direct investment, Labor force
Economic growth is influenced by many factors However, investment and labor should be the most important factors for economic growth Furthermore, investment consists
The labour force is influenced by various factors, including foreign direct investment (FDI), private investment, and public investment These components can significantly affect economic growth, although their impact may vary, with some instances showing no clear empirical evidence linking them.
Operational Definition of Variables and other term
In this study, economic growth is measured using the Gross Domestic Product (GDP) index, which serves as a comprehensive indicator of the overall production and business activities within an economy over a specific period GDP can be assessed at both current and constant prices, but for the purposes of this research, we focus on Real Gross Domestic Product, calculated at constant prices to provide a more accurate reflection of economic growth.
The GDP growth rate is a crucial indicator of economic health, reflecting the speed of a country's economic growth by comparing its gross domestic product (GDP) from one year to the previous year This rate fluctuates through the four phases of the business cycle: peak, contraction, trough, and expansion A positive GDP growth rate signifies an expanding economy, while a negative rate indicates a recession.
Public investment is the investment of the State in the programs and projects to build economic - social infrastructure and activities investment programs and projects for economic
Public Investment Law No 49, enacted by the National Assembly of Vietnam in 2014, defines public investment as the allocation of capital by the public sector for developmental purposes This law emphasizes the importance of strategic public sector funding in driving social development initiatives.
In the conceptual framework of study, Private Investment is understood that Domestic Private sector capital investment for development
In the conceptual framework of study, Foreign direct investment is understood that the Foreign invested sector capital investment for development
The labor force refers to the total number of individuals within an economy who are either currently employed or actively seeking employment In this context, the labor force encompasses all individuals engaged in work or those looking for job opportunities.
Economic growth is dependent variable; while Public Investment are independent variables Private Investment, Foreign direct investment, Labor force are Control Variables.
Significance of the Study
This research is going to be significant in the following aspects:
As regards the policy makers:
Public investment is one of the economic development policy - a very important social of any state, especially significant for countries in transition and developed market economy as Vietnam
Firstly, the results of this study indicate the relationship between public investment and economic growth in both the short term and long term, help policymakers develop policies accordingly
The findings of this study highlight the shortcomings of public investment in contemporary Vietnam and suggest strategies to enhance its efficiency This serves as a valuable resource for policymakers, enabling them to formulate a more effective public investment plan that ultimately fosters economic growth.
This study offers public investment managers in Vietnam a comprehensive overview of the current landscape The findings highlight both the strengths and weaknesses of Vietnam's public investment sector, enabling managers to leverage existing strengths, address weaknesses, and ultimately improve the efficiency of public investment initiatives.
- This study constitutes an important contribution to the empirical literature investigating the relationship between public investment and economic growth
This research enables the author to deepen their understanding of public investment, enhance their qualitative research skills, and prepare for more advanced studies in the future.
- This can be a useful reference with a relatively abundant amount of information and data about the field of public investment and economic growth in Vietnam
- Through this dissertation, future learners can form their research targets.
Scope and Limitations
The authors utilized data from the Vietnam General Statistics Office and the World Bank spanning 2006 to 2015 to investigate the relationship between public investment and economic growth in Vietnam While acknowledging various factors influencing economic growth, the research primarily focuses on the impact of public investment, relying on secondary data for analysis.
Research publications from the General Statistics Office of Vietnam are available on their electronic portal Additionally, the author can obtain further information by directly contacting the General Department of Statistics and the Ministry of Finance or by visiting their respective websites for the necessary reports.
The author made the data collection from February 2016 to September 2016
The primary data utilized in this analysis is sourced from the Vietnam General Statistics Office, along with additional information from the World Bank, which may lead to inconsistencies in the findings It is important to note that time series methods should not be applied to data that lacks a long-term separation; for instance, public investment data for specific regions has only been available since 2005.
Public investment and domestic private investment data, along with economic growth figures, have been accessible only since 1986 Access to a longer historical dataset would enhance the reliability of these statistics.
Data from the General Statistics Office of Vietnam are also inconsistencies together Besides, the statistical criteria of the phase difference have the effect of restricting the study
Public investment in Vietnam differs significantly from that in other countries, as the investment activities of state-owned enterprises are integrated into the overall state investment framework This study highlights that data from these enterprises, which are primarily focused on business objectives, do not align with public purposes Consequently, assessing the effectiveness of public investment becomes challenging and often inaccurate.
REVIEW OF RELATED LITERATURE AND STUDIES
An Overview of economic growth theory and public investment
2.1.1 Overview of economic growth theory
The Classical Theory of Growth, as outlined by Lanza (2012), posits that with a fixed amount of labor and a specific production level, workers receive wages based on subsistence needs, while any surplus generated (Total Surplus = Total Production - Total Cost) is accrued by capitalists This surplus leads to increased labor demand, ultimately driving wages upward within a stable population context.
According to the Malthusian Theory of Population, when wages temporarily rise above the subsistence level, the population increases This growth in population leads to a higher supply of labor, which ultimately causes wages to decline back to the subsistence level.
The growth dynamics conclude when the law of diminishing returns takes effect, resulting in wages consuming all production and leaving no surplus for accumulation, expansion, or population growth This "magnificent dynamics" fades away quietly, as illustrated in Fig 2.1.
Figure 2.1 The classical theory of growth
The Classical Theory of Growth
The vertical axis measures TP and the horizontal axis measures L = Labor and OW line is a subsistence wage line With ON1 population, production is OP, wage per unit is
N1W1 and surplus or profit is N1E1, when TP = Wages + Profits
The emergence of a surplus leads to accumulation, driving an increased demand for labor and resulting in higher wages at E1N1 As labor demand rises with accumulation, the labor supply remains constant at ON1 due to a stable population However, when wages exceed the subsistence level (N1E1 > N1W1), population growth is stimulated, expanding labor supply to ON2.
When the population reaches level ON2, a surplus reappears at W2E2, causing wages to return to subsistence levels, which triggers a cycle that continues until the economy stabilizes at point E At this stage, where wages equal total product (W = TP), there is no surplus, marking the arrival of the "day of doom." However, the introduction of technical progress, indicated by a shift from TP to TP', postpones this day of doom, although it does not completely eliminate it.
The significance of technological advancement has often been overlooked in the model, as evidenced by experience It is clear that the influence of disaster risk (DR), once seen as a harbinger of impending doom, has notably decreased over time.
The iron law of wages posits that wages cannot exceed the subsistence level, a notion that has been challenged as it oversimplifies wage determination by focusing solely on supply Unlike this theory, wages are influenced by both demand and supply factors Additionally, the impact of trade unions on wage negotiations and outcomes is overlooked, highlighting the need for a more nuanced understanding of wage dynamics.
The Malthusian Theory of Population Growth has been proven misleading when examining the economic development of advanced European countries The notion that higher wages lead to increased birth rates, as proposed by Malthus, is both logically and empirically flawed.
(4) The classical model seems to be too simplistic to account for the complex factors which influence the growth (Lanza, 2012)
2.1.1.2 Keynesian Theory and the Classical Theory
In classical theory, money is considered a mere "veil," having no impact on real factors such as output and employment, and it does not influence equilibrium analysis of value and distribution In contrast, the Keynesian model posits that money significantly affects the equilibrium values of output and employment Patinkin (1954) later sought to bridge value and monetary theory by introducing the concept of the real balance effect.
The primary conflict between Keynesian and classical theories revolves around how to address the imbalance between money demand and supply.
According to classical theory, an increase in the money supply leads to higher unwanted cash holdings, prompting rational individuals to spend excess money on goods and services, which in turn drives prices upward while maintaining the same level of output.
The mechanism is explained with the help of the quantity theory: MV = PT, where M
In economic theory, the relationship between money supply (M), velocity of money (V), price level (P), and total transactions (T) suggests that if V and T remain stable in the short term, an increase in M will positively affect prices However, critics argue that if either V or T changes alongside M, the direct correlation between money supply and price level may not persist (Ghatak, 2003).
New monetarists argue that a stable demand for money means that increasing the money supply (M) will eventually lead to higher prices, although the impact may not be immediate This relationship aligns with the ordinary transaction demand (k), which is considered a constant proportion of income (Y), expressed as M = kY.
According to Keynesian theory, increasing the money supply elevates bond prices and lowers interest rates, which in turn boosts investment, output, and employment levels In situations of excess capacity, the impact on prices from a rising money supply is minimized When underemployment is present, price levels remain stable as long as the output supply is elastic relative to the money supply, ultimately influencing income, output, and employment (Ghatak, 2003).
2.1.1.3 Marxist Theory of Economic Growth
Marx critiqued key aspects of Classical economic growth theory, proposing an alternative framework that emphasizes the influence of economic forces within a socio-historical context He dismissed the law of diminishing returns, arguing that the Classical theory of the Stationary State resulted from human actions rather than being governed by fixed natural laws Additionally, Marx criticized the Malthusian theory of Population for similar reasons.
Approaches to estimate relationships in macro economic variables
2.2.1 The Engle-Granger Two-Step Modeling Method (EGM)
The Engle-Granger Method (EGM), proposed by Engle and Granger in 1987, has gained significant attention recently due to its ability to model long-run equilibrium relationships through a simple regression of variable levels In the initial step, the dynamics are disregarded, and the cointegrating regression is estimated using Ordinary Least Squares (OLS).
In the equation Ct = βYt + ut, both Ct and Yt are nonstationary variables integrated of order one (I(1)) For Ct and Yt to be cointegrated, the estimated residuals must be stationary (I(0)) Due to the nonstationarity of the variables, there is a risk of the "spurious regression problem," leading to unreliable standard error estimates and t-statistics in the cointegrating regression Consequently, the standard statistical tests on R² and t-statistics of the estimated coefficients should be approached with caution unless a correction procedure is implemented to address potential biases Various correction methods have been proposed by Engle and Yoo (1991), Park and Phillips (1988), Phillips and Hansen (1990), and West (1988).
The second step entails estimating a short-run model using an error-correction mechanism (ECM) through Ordinary Least Squares (OLS) The Granger Representation Theorem (GRT) indicates that if variables like Ct and Yt are cointegrated, an ECM will exist that connects these variables, and the reverse is also true Establishing cointegration between Ct and Yt is essential for this analysis.
The estimate of obtained from the first-step long-run regression can be integrated into the subsequent short-run model, where the remaining parameters are consistently estimated using Ordinary Least Squares (OLS) Specifically, we substitute the estimate from the long-run equation into the error-correction term (C t - Y t) of the short-run equation.
The equation \(C_t = \alpha_1 \Delta Y_t + \alpha_2 (C - \beta Y)_{t-1} + \epsilon_t\) represents the relationship between consumption and income, where \(\Delta\) indicates first-differences and \(\epsilon_t\) is the error term In practice, \(C_t - \beta Y_t = u_t\) allows for the substitution of estimated residuals from the first equation into the error-correction term, as they are identical The coefficient \(\alpha_2\) in the short-run equation must be negative and statistically significant, with a value between -1 and 0 to prevent an explosive process According to the Generalized Regression Theory (GRT), a negative and statistically significant \(\alpha_2\) is essential for confirming cointegration among the variables This serves as compelling evidence of cointegration established in the initial step Furthermore, the second step of the Error Correction Model (EGM) ensures that spurious regression is avoided due to the stationarity of the variables The combination of these two steps results in a comprehensive model that integrates both static long-run and dynamic short-run elements.
To summarize the Error Correction Model (ECM) process, the first step involves estimating Equation (i) using Ordinary Least Squares (OLS) and testing the error terms for stationarity In the second step, if the null hypothesis of no cointegration is rejected, Equation (ii) is estimated by substituting the previously computed OLS estimate of β into the error-correction term (C_t - βY_t) or by using the estimated residuals (u_t) in place of (C_t - βY_t), with many practitioners favoring the latter approach for its simplicity It is essential that all variables and residuals are stationary in this step, provided the model is correctly specified.
2.2.2 The Engle-Yoo Three-Step Modeling Method (EYM)
Engle and Yoo (1991) introduce a three-step estimation technique to address the limitations of the classical two-step Error Correction Model (EGM) The primary drawbacks of the EGM include the potential inefficiency of long-run static regression estimates, despite their consistency, and the challenges posed by the non-normal distribution of the co-integrating vector estimators, which complicates the assessment of parameter significance.
The third step involves correcting the parameter estimates obtained in the first step to ensure that standard tests, like the t-test, can be effectively applied (refer to Engle and Yoo, 1991; Cuthbertson et al., 1992) The process consists of three steps: initially, a standard co-integrating regression is estimated, represented by Eq (1), where ut denotes the OLS residual, yielding the first-step estimates.
To estimate a second-step dynamic model, utilize the lagged residuals from the co-integrating regression as an error-correction term, following the framework outlined in Eq (2) The final step involves conducting the regression analysis to obtain the results.
t = (- 2 Y t ) + v t (iii) The appropriate correction for the first-step estimates is, then, simply
cor = * + (iv) and the correct standard errors for cor are given by the standard errors for in the third-step regression
Engle and Yoo (1991) analyze the differences between the EGM and the Johansen ML procedure, noting that while the Johansen method offers certain benefits, it comes with increased computational complexity They highlight that the three-step estimator can achieve the same limiting distribution as the Johansen method through an additional OLS regression applied to the two-step estimate.
Banerjee et al (1986) emphasize that neglecting lagged terms in small samples can lead to biased parameter estimates To address this issue, researchers have sought to incorporate dynamic components, such as lags, leads, or differences, into alternative co-integrating regressions to mitigate bias.
(1993), Phillips and Loretan (1991), Saikkonen (1991); also for the use of Autoregressive Distributed Lag (ADL) models in estimating the long-run relationships
Saikkonen (1991) introduces a new asymptotically efficient estimator that can be easily computed using Ordinary Least Squares (OLS) without the need for initial estimation This long-run estimator is structured in a simplified manner, specifically related to the regression model (i).
A time domain correction in the classical Engle-Granger static long-run regression is achieved by incorporating the first-differences, Yt-1 and Yt+1 According to Saikkonen (1991), this approach aims to enhance the efficiency of the OLS estimator by utilizing all available stationary information to better capture the short-run dynamics of the co-integration regression By increasing the amount of stationary data, the error covariance matrix related to the co-integration regression can be reduced, thereby improving its asymptotic efficiency.
2.2.4 The Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR) Method
Due to the existence of VAR modeling within the Johansen method (Johansen (1988,
The concept of co-integration, as discussed by Johansen and Juselius (1990), becomes increasingly complex both conceptually and computationally To address this, we will present a simplified version, beginning with the assumption that the vector of variables Z can be represented in a specific manner.
(vi) where Zt contains all n variables of the model and Et is a vector of random errors This model can also be represented in the form of
Let us now focus on matrix Matrix can be represented in the following form:
= . where and are both nxr matrices
The Johansen method utilizes the co-integrating matrix (matrix β) and the adjustment matrix (matrix α) to provide direct estimates of co-integrating vectors and to test the order of co-integration (r) In a VAR model with N variables, the maximum number of co-integrating vectors is r = N-1 The Johansen procedure is recognized for its superior statistical properties and higher power in co-integration testing compared to the Engle-Granger (EG) method; however, these methods are based on different econometric frameworks and cannot be directly compared The Johansen method can also serve as an auxiliary tool for single-equation modeling, validating the division of endo-exogenous variables and confirming the single-equation model Following Charemza and Deadman (1992), it is essential to view single-equation and systems-based methods as complementary If the Johansen results indicate a unique co-integrating vector with economically sensible coefficients that align closely with those from the EG method, this can further validate the single-equation model applied with the EG approach.
Review of related studies
2.3.1 International studies on the relationship between economic growth and public investment
International research on the relationship between public investment and economic growth reveals diverse findings These studies often incorporate additional variables such as foreign direct investment, private investment, and labor into their models Various hypotheses regarding the influence of public investment on economic growth have been tested across different countries, utilizing a range of methodologies and data sets.
In a study conducted by Aschauer (1989a) analyzing seven G7 countries from 1967 to 1985, the impact of investment on economic growth was examined Utilizing a time series model with lagged variables for both public and private investment, the findings revealed that public nondefense budgets play a more significant role in enhancing productive capacity compared to defense or nondefense expenditures Additionally, the defense budget was found to have a minimal influence on production capabilities, whereas infrastructure demonstrated a substantial effect on productivity.
Aschauer (1989b) analyzed the efficiency of public spending in the United States from 1949 to 1985 using a time series model and a Cobb-Douglas function, revealing that GDP is influenced by labor, private investment, and public investment The findings indicated that public investment significantly contributes to economic growth, being 2-5 times more impactful than private investment Additionally, the study highlighted that the accumulation of public capital positively affects private investment, suggesting that a robust long-term public investment strategy is an effective means to foster economic growth and enhance private investment.
Barro (1990) analyzed the impact of public investment and expenditure on economic growth across 98 countries from 1960 to 1985, revealing that public investment has a positive and significant effect on growth However, he cautions that excessive public investment can distort market dynamics and should not be relied upon as a sustainable strategy for maintaining a strong economy.
Khan and Reinhart (1990) explored the impact of public and private sector investments on economic growth by developing a growth model that distinguishes these effects They identified output as the dependent variable, influenced by physical capital, labor force, and other growth factors The study assumes that factor productivity increases at an exogenous rate By estimating growth coefficients and elasticities, the research highlights the varying contributions of production factors and productivity Grounded in the neoclassical framework of Solow (1956), the findings reveal that private investment has a more significant direct impact on growth compared to public investment Consequently, the study supports the notion that prioritizing private investment in development strategies is empirically justified.
Cullison (1993) emphasized the crucial role of government investment in education and labor training for fostering future economic growth He highlighted that such spending primarily influences human capital rather than physical capital, particularly in areas like education and civilian safety.
Hsieh and Lai (1994) conducted an analysis of G7 data using Granger causality tests and the impulse response function within a VAR model based on Barro's (1990) endogenous growth model Their empirical findings indicate that the relationship between government spending and economic growth has evolved over time, particularly among industrialized nations classified in the "growth group." Notably, the study reveals a lack of clear evidence supporting the notion that reducing government spending could lead to an increase in GDP per capita.
Hadjimichael and Ghura (1995) examined the effects of public policy, private investment, and savings on economic growth in 41 Sub-Saharan African countries from 1981 to 1992 Their findings revealed that increased private investment positively influenced GDP per capita Economic growth was driven by public policies aimed at reducing budget deficits, controlling inflation, fostering competition, restructuring the economy, promoting human resource development, and managing population growth The study also highlighted issues of GDP per capita convergence related to human resource policies and public policy Overall, the research concluded that public and macroeconomic policies significantly benefited private investment and economic growth.
Deverajan et al (1996) examined the relationship between public expenditure and economic growth, identifying conditions under which changes in expenditure composition can enhance steady-state growth rates Their analysis of data from 43 developing countries over two decades revealed that increasing the share of current expenditure positively impacts growth, while excessive capital expenditure negatively affects per-capita growth These findings suggest that governments in developing countries may be misallocating resources by prioritizing capital expenditures over current expenditures, leading to unproductive outcomes.
De Gregorio and Guidotti (1995) explored the relationship between financial development and long-run growth, using the ratio of bank credit to the private sector relative to GDP as an indicator of financial development Their study examined various factors, including primary and secondary school enrollment, GDP per capita, political instability, government spending, literacy rates, foreign investment, and inflation, with average GDP per capita growth over six-year periods as the dependent variable Employing a cross-section regression methodology based on Barro (1991) and using ordinary least squares (OLS) for estimations, the researchers found that financial development generally enhances growth performance, primarily through its impact on investment efficiency rather than its level However, they noted that unregulated financial liberalization, as seen in Latin America during the 1970s and 1980s, could result in a negative relationship between financial intermediation and growth due to expectations of government bailouts.
Khan and Kumar (1997) conducted a study on 95 developing countries from 1970 to 1990, revealing that private investment significantly outperforms public investment in fostering economic growth, particularly in the 1980s Their analysis indicates that the net returns on private capital have consistently increased over time, while the effectiveness of both public and private investment, along with growth rates and returns, varies across different regions Additionally, Ramirez and Nazmi analyzed cross-country data from nine major Latin American countries between 1983 and 1993, contributing further insights into these investment dynamics.
In 2003, it was emphasized that both public and private investments play a crucial role in fostering economic growth Nonetheless, it was noted that government spending can adversely affect private investment and overall growth Importantly, targeted public expenditure on education and health was found to have a positive and statistically significant influence on private capital formation and sustained economic growth.
Cruz and Teixeira (1999) employed the autoregressive distributed lag (ARDL) model to examine the influence of public investment on private investment in Brazil from 1947 to 1990 Their findings highlight that GDP is a key factor driving private investment, while the substitution of private investment by public investment occurs primarily in the short term Additionally, the study reveals a long-term complementarity between private and public investment, as indicated by the coefficients in the long-run adjustment.
Yakita (2001) examined how monetary expansion influences capital accumulation and economic growth within an overlapping generation model, emphasizing human capital accumulation as a growth engine The study focuses on the effects of monetary policy on economic growth, particularly the balanced-growth implications of policy changes By increasing the money growth rate while maintaining a constant government consumption/human capital ratio, the analysis reveals that heightened life anticipation diminishes the real impact of monetary expansion and may negatively skew the inflation-economic growth relationship The model assumes a constant elasticity of substitution between consumption and real money holdings, a premise also utilized by Van der Ploeg and Alogoskoufis (1994) and Mino and Shibata (1995), which is crucial to the argument The AK model employed in this study builds on previous findings, demonstrating that human capital accumulation continues to drive positive growth effects despite the inflation tax induced by monetary expansion, which may lead individuals to curtail consumption and alter the balanced-growth trajectory.
Le and Suruga (2005) analyze the effects of public investment and foreign direct investment (FDI) on economic growth across 105 countries from 1970 to 2009, revealing that both positively influence growth However, they note that FDI's benefits diminish when public investment exceeds 8-9%, suggesting that excessive public investment may crowd out private investment (Blejer and Khan, 1984) Furthermore, empirical evidence indicates that public investment in infrastructure, particularly transportation and communications, positively impacts economic growth, while investments in state-owned enterprises tend to have negative effects (Khaliq and Noy, 2007) Similarly, Easterly and Rebelo (1993) find that only investments in transport and communication yield positive growth effects in a mixed sample of developed and developing nations.