Investment and Economic Growth: An Empirical Analysis for Tanzania

Manamba EPAPHRA, John MASSAWE

Abstract


Abstract. This paper analyzes the causal effect between domestic private investment, public investment, foreign direct investment and economic growth in Tanzania during the 1970-2014 period. The modified neo-classical growth model is used to estimate the effect of investment on economic growth. Also, the economic growth models based on Phetsavong & Ichihashi (2012), and Le & Suruga (2005) are used to estimate the crowding out effect of public investment on domestic private investment on one hand and foreign direct investment on the other hand. In the same way, the crowding out effect of foreign direct investment on domestic private investment is estimated. A correlation test is applied to check the correlation among independent variables, and the results show that there is very low correlation suggesting that multicollinearity is not a serious problem. Moreover, the diagnostic tests including RESET regression errors specification test, Breusch-Godfrey serial correlation LM test, Jacque-Bera-normality test and white heteroskedasticity test reveal that the model has no signs of misspecification and that, the residuals are serially uncorrelated, normally distributed and homoskedastic. Broadly, the empirical results show that the domestic private investment and foreign direct investment play an important role in economic growth in Tanzania. Besides, a revealed negative, albeit weak, association between public and private investment suggests that the positive effect of domestic private investment on economic growth becomes smaller when public investment-to-GDP ratio exceeds 8-10 percent. Similarly, foreign direct investment tends to marginally reduce the impact of domestic private investment on growth. These results suggest that public investment and foreign direct investment need to be considered carefully in order to avoid a reduced positive impact of domestic private investment on growth. Domestic saving may be promoted to encourage domestic investment for economic growth.

Keywords. Public investment, Domestic private investment, FDI, Crowding out effect, Economic growth.

JEL. F21, F43, O40, O47.

Keywords


Public investment; Domestic private investment; FDI; Crowding out effect; Economic growth.

Full Text:


References


Aitken, B.J. & Harrison, A.E. (1999). Do domestic firms benefit from direct foreign investment? evidence from Venezuela. American Economic Review, 89(3), 605-618. doi. 10.1257/aer.89.3.605.

Aschauer, D.A. (1989). Does public capital crowd out private capital?. Journal of Monetary Economics, 24(2), 171-188. doi. 10.1016/0304-3932(89)90002-0

Aurangzeb, A., & Haq, U. (2012). Impact of investment activities on economic growth of Pakistan. Business and Management Review, 2(1), 92-100.

Banerjee, A., Dolado, J., Galbraith, J.W., & Hendry, D.F. (1993). Co-integration, Error-correction, and the Econometric Analysis of Non-stationary Data. Oxford University Press, Oxford.

Bank of Tanzania (BoT), (2016). Annual report (2014/2015). Directorate of Economic Research and Policy, Bank of Tanzania.

Barro, R.J. (1995). Determinants of economic growth. The MIT Press, London.

Barro, R.J. (1991). Economic growth in cross section of countries. Quarterly Journal of Economics, 106, 407-444. doi. 10.2307/2937943

Barro, R.J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103-125. doi. 10.1086/261726

Bassanini, A., Scarpetta, S., & Hemmings, P. (2001). Economic growth: the role of policies and institutions: panel data. evidence from OECD countries. OECD Economics Department Working Papers, No. 283, OECD Publishing, Paris. doi. 10.1787/722675213381

Becker, G.S., Glaeser, E.L., & Murphy, K.M. (1999). Population and economic growth, American Economic Review, 89(2), 145-149. doi. 10.1257/aer.89.2.14

Bengoa, M., & Sanchez-Robles, B. (2003). FDI, economic freedom, and growth: new evidence from Latin America. European Journal of Political Economy, 19, 529-545. doi. 10.1016/S0176-2680(03)00011-9

Bhagwati, J., & Srinivasan, T.N. (2001). Outward-orientation and development: are the revisionists right? In Deepak Lal & Richard H. Snape (Eds.). Trade, Development, and Political Economy: Essays in Honour of Anne O. Krueger. Palgrave Macmillan, London.

Blejer, M., & Khan, M.S. (1984). Private investment in developing countries. Finance and Development, 21(2), 26.

Bloom, D.E., Sachs, J.D., Collier, P., & Udry, C. (1998). Geography, demography, and economic growth in Africa. Brookings Papers on Economic Activity, pp.207-295.

Bloom, D., Canning, D., & Sevilla, J. (2002). Health, worker productivity, and economic growth. 13th annual Health Economics Conference, pp. 2-3.

Bruno, M., & Easterly, W. (1998). Inflation crises and long-run growth. Journal of Monetary Economics, 41(1), 3-26. doi. 10.1016/S0304-3932(97)00063-9

Bulmer, M.G. (1965). Principles of Statistics. Oliver & Boyd, Edinburgh, London.

Cihan, C. (2006). An empirical analysis of knowledge production function: what differs Among the OECD countries including Turkey. PhD Thesis. The University of Sydney: School of Economics and Political Science.

Clark, J.M. (1917). Business acceleration and the law of demand: a technical factor in economic cycles. The Journal of Political Economy, 25(3), 217-235. doi. 10.1086/252958

Clarke, D. (2013). Africa 2050: economic revolution of global: the International Briefing Second Quarter, pp.18-19. [Retrieved from].

Crafts, N., & Toniolo, G. (1996). Economic growth in Europe since 1945. Cambridge University Press.

Denton, F.T., & Spencer, B.G. (1998). Economic costs of population aging. Research Institute for Quantitative Studies in Economics and Population, McMaster University.

Denton, F.T., & Spencer, B.G. (1997). Population, labour force and long-term economic growth. Hamilton, Ont.: Research Institute for Quantitative Studies in Economics and Population, McMaster University.

Devarajan, S., Swaroop, V., & Zou, H. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37(2), 313-344. doi. 10.1016/S0304-3932(96)90039-2

Diamond, J. (1989). Government Expenditure and Economic Growth: An Empirical Investigation. International Monetary Fund, Fiscal Affairs Department. doi. 10.5089/9781451974157.001

Dollar, D. (1992). Outward-oriented developing economies really do grow more rapidly: evidence from 95 LDCs, 1976-1985. Economic Development and Cultural Change, 40(3), 523-544. doi. 10.1086/451959

Dollar, D., & Kraay, A. (2001). Trade, growth, and poverty. Policy, Research working paper; no. WPS 2615. Washington, DC: World Bank.

Dos Santos, T. (1971). The structure of dependence, in K.T. Fann and Donald, C. Hodges, eds., Readings in U.S. Imperialism. Boston: Porter Sergeant, pp. 226.

Duval, R., Eris, M., & Furceri, D. (2010). Labour force participation hysteresis in industrial countries: evidence and causes. OECD, Economics Department.

Easterly, W., & Rebelo, S. (1993). Fiscal policy and economic growth. Journal of Monetary Economics, 32(3), 417-458. doi. 10.1016/0304-3932(93)90025-B

ECA, (1999). Economic report on Africa: the challenge of poverty Reduction and sustainability. ECA. Addis Ababa, Ethiopia.

Edey, M. (1994). Costs and benefits of moving from low inflation to price stability. OECD Economic Studies, 23(1), 109-130.

Eduardo, C., & Christian, D. (2011). Public investment in developing countries: a blessing or a curse? Journal of Comparative Economics, 39, 65-81. doi. 10.1016/j.jce.2010.10.001

Ejaz, M. (2007). Determinants of female labour force participation in Pakistan: an empirical analysis of PSLM (2004-2005) micro data. Lahore Journal of Economics, 2013-235

Engle, R.F., & Granger, C.W. (1987). Co-integration and error correction: representation, estimation and testing. Econometrica, 55(2), 251-276. doi. 10.2307/1913236

Epaphra, M. (2014). Empirical investigation of the determinants of Tanzania’s national savings. Journal of Economics and Development Studies, 2(4), 223-241. doi. 10.15640/jeds.v2n4a16

Erden, L., & Holcombe, R.G. (2005). The effects of public investment on private investment in developing economies. Public Finance Review, 33(5), 575-602. doi. 10.1177/1091142105277627

Everhart, S.S., & Sumlinski, M.A. (2001). Trends in private investment in developing countries: statistics for 1970-2000 and the impact on private investment of corruption and the quality of public investment. World Bank Publications, Discussion Paper No.44, International Finance Corporation, the World Bank, Washington, D.C.

Frankel, J.A. & Romer, D.H. (1999). Does trade cause growth? American Economic Review, 89(3), 379-399. doi. 10.1257/aer.89.3.379

Gallup, J.L., Sachs, J.D., & Mellinger, A.D. (1999). Geography and economic development. International Regional Science Review, 22(2), 179-232. doi. 10.1177/016001799761012334

Ghosh, S., & Gregoriou, A. (2008). The composition of government spending and growth: is current or capital spending better? Oxford Economic Papers, 60(3), 484-516. doi. 10.1093/oep/gpn005

Gordon, M.J. (1992). The neoclassical and a post Keynesian theory of investment. Journal of Post Keynesian Economics, 14(4), 425-443. doi. 10.1080/01603477.1992.11489909

Grier, K.B., & Tullock, G. (1989). An empirical analysis of cross-national economic growth, 1951-1980. Journal of Monetary Economics, 24(2), 259-276. doi. 10.1016/0304-3932(89)90006-8

Grossman, P.J. (1988). Government and economic growth: a non-linear relationship. Public Choice, 56(2), 193-200. doi. 10.1007/BF00115758

Hanson, G.H., Mataloni, R.J., & Slaughter, M.J. (2001). Expansion strategies of US multinational firms. NBER Working Paper, No.8433. doi. 10.3386/w8433

Haque, T. (2012). Effect of public and private investment on economic growth in Bangladesh: an econometric analysis. Research Study Series No. FDRS 05/2013.

Ipumbu, W., & Kadhikwa, G. (1999). Savings and investment in Namibia. Bank of Namibia Occasional, Paper No. 2.

Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. doi. 10.1111/j.1468-0084.1990.mp52002003.x

Khaliq, A., & Noy, I. (2007). Foreign direct investment and economic growth: empirical evidence from sectoral data in Indonesia. Working paper, University of Hawaii, Manoa.

Khan, M., & Villanueva, D. (1991). Microeconomic policies and long-term growth: a conceptual and empirical review. IMF Working Paper.

Khan, M.S., & Reinhart, C.M. (1989). Private investment and economic growth in developing countries. International Monetary Fund, Research Department, No.WP/89/60.

Krugman, P. (1990). Increasing returns and economic geography. NBER Working Paper, No.3275. doi. 10.3386/w3275

Le, M.V., & Suruga, T. (2005). Foreign direct investment, public expenditure and economic growth: the empirical evidence for the period 1970-2001. Applied Economic Letters, 12(2), 45-49. doi. 10.1080/1350485042000293130

Levine, R., & Renelt, D. (1992). A Sensitivity analysis of cross-country growth regressions. The American economic Review, 82(4), 942-963.

Loayza, N., Schmidt-Hebbel, K., & Serven, L. (2000). Saving in developing countries: an overview. World Bank economic Review,14(3), 393-414. doi. 10.1093/wber/14.3.393

Lorentzen, P., McMillan, J., & Wacziarg, R. (2008). Death and development. Journal of Economic Growth, 13(2), 81-124. doi. 10.1007/s10887-008-9029-3

Lucas Jr, R.E (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. doi. 10.1016/0304-3932(88)90168-7

Maaida, H.H., Waqar, A., & Hashmi, A. (2012). Role of investment in the course of economic growth in Pakistan. International Journal of Academic Research in Economics and Management Sciences, 1(5), 48-61.

Marlow, M.L. (1986). Private sector shrinkage and the growth of industrialized countries. Public Choice, 49(2), 143-154. doi. 10.1007/BF00155674

Malthus, T. R. (1798). An essay on the principle of population, as it affects the future improvement of society: with remarks on the speculations of Mr. Godwin, M. Condorset, and other writers. J. Johnson.

Mankiw, N.G., Romer, D., & David, W. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407-437. doi. 10.2307/2118477

Mattana, P. (2004). The Uzawa-Lucas endogenous growth model. Aldershot: Ashgate Publishing Limited. Ministry of Planning. National Accounts for Different Years.

Μoudatsou, A. (2003). Foreign direct investment and economic growth in the European Union, Journal of Economic Integration, 18(4), 689-707. doi. 10.11130/jei.2003.18.4.689

Mukherjee, C., White, H., & Wuyts, M. (1998). Econometrics and Data Analysis for Developing Countries. Routledge, 2 Edition.

Ngowi, H.P. (2009). Public-private partnership (PPP) in service delivery: application, reasons, procedures, results and challenges in Tanzanian Local Government Authorities (LGAs). Africa Growth Agenda, pp.34-36.

Nunnenkamp, P., & Spatz, J. (2004). Intellectual property rights and foreign direct investment: a disaggregated analysis. Review of World Economics, 140(3), 393-414. doi. 10.1007/bf02665982

Nwachukwu, T.E., & Odigie, P. (2011). What drives a private saving in Nigeria. Paper Presented at Workshop Organised by African Economic Research Consortium (AERC), Nairobi Kenya.

Obstfeld, M (2009). International finance and growth in developing countries: what have we learned?, IMF Staff Papers, 56(1), 63-111. doi. 10.1057/imfsp.2008.32

Peden, E.A., & Bradley, M.D. (1989). Government size, productivity, and economic growth: the post-war experience. Public Choice, 61(3), 229-245. doi. 10.1007/BF00123886

Phetsavong, K. & Ichihashi, M. (2012). The impact of public and private investment on economic growth: evidence from developing Asian countries. DEC Discussion Paper, Hiroshima University

Prebisch, R. (1950). Dependency Theory New.

Ramírez, O.A., Misra, S.K., & Nelson, J. (2002). Estimation of efficient regression models for applied agricultural economics research. 002 Annual Meeting of the American Agricultural Economics Association, Long Beach, CA, July 28-31.

Rodriguez, F. & Rodrik, D. (2001). Trade policy and economic growth: a skeptic's guide to the cross-national evidence. In NBER Macroeconomics Annual,15, 261-338. MIT Press. doi. 10.3386/w7081

Rodrik, D. (1996). Why do more open economies have bigger governments?, NBER Working Paper, No.537. doi. 10.3386/w5537

Romer, P. M. Increasing Returns and Long-Run Growth. The Journal of Political Economy, 1986, Vol. 94(5), pp. 1002-1037.doi.org/10.1086/261420

Samuelson, P.A. (1939). Interactions between the multiplier analysis and the principle of acceleration. The Review of Economics and Statistics, 21(2), 75-78. doi. 10.2307/1927758

Saqib, N., Masnoon, M., & Rafique, N. (2013). Impact of foreign direct investment on economic growth of Pakistan. Advances in Management & Applied Economics, 3(1), 35-45.

Solow, R.M. (1957). A contribution of the theory of economic growth. Quarterly Journal of Economics,70(1), 65-94. doi. 10.2307/1884513

Stock, J.H., & Watson, M.W. (2007). Introduction to Econometrics. Pearson Education, Inc. Second Edition.

Swaby, R. (2007). Public investment and growth in Jamaica. Research and Economic Programming Division, Bank of Jamaica, Kingston.

Tanzania Investment Report, (2015). Reports on the Study of Foreign Private Investment. Dar es Salaam.

Tanzania: Household Budget Survey, (HBS), (2011-2012).

Tawiri, N. (2010). Domestic investment as a drive of economic growth in Libya. In International Conference on Applied Economics, ICOAE, pp.759-767.

Thirlwall, A.P. (1994). Economic growth and the balance of payments constraint, London: Macmillan.

Tsen, W.H., & Furuoka, F. (2005). The relationship between population and economic growth in Asian economies. ASEAN Economic Bulletin, 22(3), 314-330.

United Nations Conference on Trade and Development (2014). Economic development Africa Report. catalyzing investment for transformative growth in Africa, TD/B/61/4

United Republic of Tanzania, (2015), The Economic Survey. Dar es Salaam.

United Republic of Tanzania, (2014). The Economic Survey. Dar es Salaam.

United Republic of Tanzania, (2013). The Economic Survey, Dar es Salaam.

Wacziarg, R., & Welch, K.H. (2003). Trade liberalization and growth: new evidence. NBER Working Paper No.10152. doi. 10.3386/w10152

Warner, A. (2014). Public investment as an engine of growth. IMF Working Paper Research Department and Strategy, Policy, and Review Department, Working Paper, No.WP/14/148.

World Bank Group, (2014). World Development Indicators.

World Bank Group, (2015). World Development Indicators.

World Bank Group, (2016). World Development Indicators.

World Health Organization, (2001). International classification of functioning, disability and health: ICF. World Health Organization.




DOI: http://dx.doi.org/10.1453/ter.v3i4.1019

Refbacks

  • There are currently no refbacks.




.......................................................................................................................................................................................................................................................................................................................................

Turkish Economic Review - Turk. Econ. Rev. - TER - www.kspjournals.org

ISSN: 2149-0414. Editor : editor-ter@kspjournals.org   Secretarial: secretarial@kspjournals.com   Istanbul - Turkey.

Copyright © KSP Journals