Fiscal policy and private investment in africa- a test of the crowding-out hypothesis – complete project material

Thesis Abstract

This study probes the effectiveness of fiscal spending in the context of crowding out/in hypothesis for Sub-Saharan Africa, using annual panel data for the period 2000 – 2011 obtained from the World Bank online data bank for forty six countries in the region. The data set were included in the model based on review of past studies and taken mainly as a ratio to GDP to minimize the problem of heteroscedasticity. The fixed effects model was applied based on the specification tests. The panel output indicates that private investment is positively responsive to fiscal policy measures- though minimally, hence increases in government spending are found to crowd in private investment in all the countries selected both individually and on the average. Variables like real exchange rate and value of total debt servicing as a ratio of GDP have positive significant effect on private investment in the region. While the value of total external debt as ratios of GDP and real interest rate have significant negative effect on private investment. The study also finds that real per capita income growth has positive significant effect on private investment with random effects model only, whereas domestic credit to the private sector appeared insignificant and negative. Other macro variables such as inflation, real per capita GDP and real per capita income growth, are statistically insignificant in affecting the behaviour of private investment in the region. The study therefore recommends, among other things, a strengthened proactive regional fiscal policy agenda – with no room for half measures- aimed at stimulating private investment as well as ensuring a stable, predictable and healthy macroeconomic environment. Also, efficient and effective public-private strategies will reduce information asymmetries between both sectors on investment related policies and pave the way, all other things being equal, for the much desired economic transformation of the sub-region.

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