Determinants of Public and Private Investment An Empirical Study of Pakistan

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1 eraioal Joural of Busiess ad Social Sciece Vol. 3 No. 4 [Special ssue - February 2012] Deermias of Public ad Privae vesme A Empirical Sudy of Pakisa Rabia Saghir 1 Azra Kha 2 Absrac This paper aalyses he deermias of public ad privae ivesme i Pakisa usig ime series daa for he period By usig co-iegraio ad error correcio he aalysis shows ha goverme ivesme egaively effec privae ivesme which shows crowdig ou effec. shor ru lagged chage i goverme ivesme is sigifica ad posiive. The effec of aid o goverme ivesme is posiive bu isigifica i shor ru. Privae ivesme has sigifica ad posiive impac o goverme ivesme. Keywords: Goverme vesme, Privae ivesme, Real ieres rae, 1. roducio The ususaiable ecoomic growh has bee blamed maily o high /low goverme expediure, low level of ivesme, ufavorable weaher codiios, poliical isabiliy ad may oher facors i he coury. Ecoomiss have log bee ieresed i kowig he facors ha coribue o ivesme i differe secor of ecoomy. vesme is a ceral issue i macroecoomic heory; i plays a impora role i ecoomic growh of a coury as i raises he producive capaciy of he ecoomy ad promoes producio echiques. rece years, emphasis has bee pu o he developme of he privae secor i developig couries o help boos ecoomic growh ad reduce povery. he lae 1980s a aleraive developme sraegy was o develop he privae secor o boos growh i developig couries. Ecoomeric evidece (Beddies 1999, Ghura ad Hadjimichael 1996, Ghura 1997) idicaes ha privae ivesme has a sroger, more favorable effec o growh raher ha goverme ivesme, probably because privae ivesme is more efficie ad is less closely associaed wih corrupio. Public ad privae secors have played impora roles i boosig ecoomic developme i he coury. The prese sudy aalyzes he Public ad privae ivesme i Pakisa by applyig error correcio model o he laes available ime-series daa for Pakisa s ecoomy for he period o provides quaiaive evidece by uderakig ecoomeric esimaes of various key macroecoomic policies explaiig public ad privae ivesme i Pakisa. The objecive of his sudy is o provide quaiaive evidece o ideify he impac of public ad privae ivesme i Pakisa. The sudy is orgaized io five secios. Secio reviews he lieraure providig heoreical perspecive ad empirical evidece o sigificace of cerai deermias of public ad privae ivesme. Secio icludes he mehodology ad esimaio echiques. Secio V of he sudy is based o resuls of co-iegraio ad error correcio echiques. Fially, Secio V cocludes he sudy based o he observed reds ad deermias of public ad privae ivesme i Pakisa, alog wih suggesig recommedaios for furher work. 2. Lieraure Review Usig he case of dia 3 a sudy seeks o ivesigae he crowdig effec of goverme ivesme o privae ivesme for he period The resuls reveal ha i log ru goverme ivesme has had a posiive impac o ecoomy bu i is less i shor ru. he medium ad log ru here is posiive relaio i sese ha goverme ivesme ifrasrucure may faciliae privae ivesme. 1 Lecurer. Deparme of Ecoomics. Foudaio Uiversiy College of Liberal Ars ad Scieces (FUCLAS), New Lalazar, Rawalpidi, & Ph.D Scholar,School of Ecoomics Sciece, Federal Urdu Uiversiy of Ars, Sciece ad Techology, slamabad, Pakisa 2 Lecurer & Ph.D Scholar, School of Ecoomic Scieces, Federal Urdu Uiversiy of Ars, Sciece ad Techology, slamabad, Pakisa. 3 Mira, P. (2006). 183

2 The Special ssue o Behavioral ad Social Sciece Cere for Promoig deas, USA Aoher aemp had bee made o ivesigae he effecs of privae ivesme o Pakisa 4, usig simulaeous equaio model for he ime period esimaed by applyig 2SLS echiques. uses aual growh rae of gross aioal produc ad aioal savig as a raio o GNP as depede variables respecively ad e privae ivesme as a raio o GNP, disbursemes of gras ad exeral loas, real rae of ieres, as idepede variables. The coclusio is ha e privae ivesme ad disbursemes of gras ad exeral loas has a posiive impac o goverme reveue. A sudy was coduced o he log ru deermias of privae ivesme i Seegal 5 usig ime series daa for uses co-iegraio, error correcio, ad ui roo as esimaig echique. The regressio resuls provide a impora isigh io he deermias of privae ivesme. Foreig aid flow has posiive impac o privae ivesme. also suppors he argume ha public ivesme makes a posiive ad sigifica effec o privae ivesme. A sudy was coduced o examie shor ru ad log ru deermias of privae ivesme for he period for Argeia 6. The resuls cofirm he exisece of log ru relaioship bewee capial accumulaios ad privae ivesme. addiio, ivesme decisios seem o be iflueced by chages i exchage rae, rade liberalizaio ad aggregae demad i shor ru. There is also evidece of crowdig ou effec of public ivesme. There is o log erm relaioship bewee he public ad privae ivesme. 3. Model specificaio vesme is a esseial compoe of aioal icome accou ideiy ad ca be wrie as follows: = f (GNP, RR, G, P, aid) (1) The equaio (1) shows ivesme as a fucio of GNP, he real rae of ieres, goverme ivesme, privae ivesme ad he flow of loa ad aid io he coury. Toal ivesme is divided io public ivesme (G) ad Privae ivesme (P). 3.1: Goverme vesme: Goverme ivesme is maily deermied by goverme reveue, ad foreig aid. Hece he goverme ivesme equaio is: G 1 GNP 2 GR 3 AD 4 P (2) 3.2: Privae vesme: Goverme ivesme is also icluded as a explaaory variable o capure crowdig ou or crowdig i effecs. Therefore, empirical form of our privae ivesme equaio is: P 1 GNP 2 RR 3 G (3) (GR) Goverme reveue, (AD) foreig aid ad loa, (G) Goverme ivesme, (P) privae ivesme, (GNP) gross aioal produc. Based o he evidece provided by lieraure i our sudy ad he characerisics of ime series daa his sudy uses differe ecoomeric echiques ha have earlier bee used by he ecoomiss. The prese sudy akes io accou he aual daa for a ime-series sudy of public ad privae ivesme i Pakisa, for he ime period GNP is ake i real erms deflaed by CP (2000=100). Goverme reveue is ake as a fracio of GDP. Aid is ake as fracio of GNP. Privae ivesme ad goverme ivesme are ake as fracio of GDP. eres rae is i real erms. (Nomial ieres rae iflaio). Daa are colleced from eraioal Fiacial Saisics. his secio we perform ecoomeric ess o fid ou he public ad privae ivesme i Pakisa. All variables used i he model are saioary a. As ADF saisics are less ha heir criical value from Fuller s able so he ull hypohesis (H0) is rejeced ad he series are saioary. As all he series are iegraed of order oe; so we check co-iegraio bewee hese series. Johase s es is used o solve he model. Uresriced VAR model is used o choose lag legh. Miimum AC is used o ideify sigifica lag legh. Followig are he resuls ad heir ierpreaios for each equaio of our model. 4. Resuls of ADF Tes This sudy uses augmeed Dickey-Fuller (ADF) ui roo es o evaluae wheher he series is saioary or o. 4 Shabir, T, e al. (1992) 5 Ouaara, B. (2004) 6 Acossa, P.ad Loza, A. (2005). 184

3 eraioal Joural of Busiess ad Social Sciece Vol. 3 No. 4 [Special ssue - February 2012] All variables used i he model are saioary a (1). The ui roo es resuls are preseed i he Appedix. The ull hypohesis (H 0 ) is rejeced as ADF saisics are less ha heir criical value from Fuller s able ad he series are saioary. As all he series are iegraed of order oe; so we check co-iegraio bewee hese series. Johase s es of co-iegraio is used o solve he model. We made uresriced VAR model o choose lag legh. Miimum AC is used o ideify sigifica lag legh. 4.1: Esimaed Log Ru Resuls goverme ivesme equaio fucio all he variables used i he model are saioary a (1) so we ca fid he log ru relaioship of public ivesme by usig co-iegraio es. Miimum AC is a lag [1], so we use his lag for co-iegraio es. The resuls of able (2) proved ha wo ru relaioships exis i goverme ivesme equaio model which ca be used o fid he ormalized co-iegraio es. The equaio for public ivesme ells us ha RGNP, goverme reveue, aid ad privae ivesme, have posiive ad sigifica coecios wih goverme ivesme i he log ru. The co-efficie of GNP have posiive sig ad also saisically sigifica. Similarly resul shows ha privae ivesme has sigifica ad posiive exeraliy effec o goverme ivesme. The resul shows ha here is posiive exeraliy effec of higher aid o goverme ivesme. The co-iegraio es resuls repored i Table (4) argue ha here exis log ru relaioships bewee he depede variable, privae ivesme, ad idepede variables. Number of coiegraig equaios show ha wo log-ru relaioships exis bewee he variables. Real ieres rae ad goverme ivesme apply egaive bu sigifica impac o real privae ivesme. Real ieres rae is sigifica a 10% while goverme ivesme is sigifica a 1% sigificace level.. O he base of resuls i ca coclude ha a icrease i ieres rae exers egaive effec o privae ivesme. ca be argued ha a decrease i ieres rae creaes appropriae ecoomic evirome ha promoes he privae secor o ives, reducig he cos of producio ad hece raisig he profiabiliy of he privae ivesme. O he oher had goverme ivesme has crowdig ou effec o privae ivesme. This is because he coefficie of goverme ivesme is egaive implyig ha i exers a upward pressure o ieres rae ad a egaive effec o privae ivesme. 4.2: Shor Ru Error Correcio Resuls: i1 l G EC 1 1 l P 5 1 e i1 l GNP 1 i i1 l GR 2 i i1 l Aid 3 i i1 l G 4 i The resuls repored i he able (3) shows ha esimaed lagged error correcio erm EC 1 is egaive ad sigifica. The coefficie is 0.23, suggesig a slow adjusme process i goverme ivesme. Nearly 23 perce of he disequilibria of previous period s shock adjus back o he log ru equilibrium i he curre year. The shor ru respose of lagged chage i goverme ivesme is sigifica ad posiive which shows ha he previous period s growh i goverme ivesme brig posiive chage i he goverme ivesme over he shor ru. Furhermore he chages i he reveue exer posiive ad sigifica impac o goverme ivesme i he shor ru.. shor ru aid has isigifica impac because mos of he porio of aid is used for o-developme expediures. Privae ivesme has isigifica impac o goverme ivesme i shor ru. The resul shows ha value of (LM) is 0.43 which is quie reasoable as should be i ime series aalysis. To assess he srucural sabiliy of he esimaed model, we also performed he CUSUMSQ es of sabiliy. The resuls are preseed i figure (1). As i ca be see from he figure, here is o moveme ouside he criical lies ha shows he model is sable. EC GNP i RR i G i 1 l 2 l 3 l i1 i1 i1 i1 l P l P e Error correcio model is used o fid he shor ru relaioship of deermias of privae ivesme fucio as resuls show i he able (5). A his sage we esimae a dyamic error correcio model (ECM) which is used for capurig he effec of macroecoomic uceraiy o privae ivesme. 185 i

4 The Special ssue o Behavioral ad Social Sciece Cere for Promoig deas, USA All he variables here are i firs differece. The error correcio erm ha is EC 1 i he esimaed equaio is sigifica ad bears a heoreically correc sigs. The esimaed co-efficie of EC 1 idicaes ha approximaely 14% of he disequilibrium i privae ivesme is correced immediaely i.e. i he ex year. he esimaed error correcio model, he coefficie of lagged chage i privae ivesme is posiive ad sigifica a 10% sigificace level which shows ha he privae ivesme i he previous period led o a posiive chage i he privae ivesme i he shor ru. This implies ha curre privae ivesme decisios i Pakisa are o some exe a leas iflueced by he ivesor s pas behavior. Real ieres rae has isigifica effec o privae ivesme so decrease i ieres rae does o affec he cos of producio i shor ru. This model passed a baery of diagosic ess. The residual passed he diagosic es of o serial correlaio (0.5123) as he value of probabiliy of F-saisics is greaer ha 0.05) ad Ramsey s Rese es is a sabiliy es which shows ha all regressio specificaio error i privae ivesme fucio is sable. The sabiliy of he esimaed fucio is esablished by usig CUSUM of squares for sabiliy. The resuls are preseed i figure (2). As ca be see from he figure, here is o moveme ouside he criical lies i he es ha shows he coefficies are sable ad here is o isabiliy i he model. 5. Coclusio & Policy mplicaio This sudy explores he public ad privae ivesme respecively. Based o co-iegraio ess he empirical resuls foud log ru relaioship bewee public ad privae ivesme ad is deermias. The fidigs are cosise wih he heoreical hypohesis. privae ivesme model log ru relaioship exiss bewee he variables. The mos ieresig coclusio from his sudy is ha a egaive relaioship is foud bewee privae ad a goverme ivesme ha suppors he exisece of crowdig ou affec as was expeced. Goverme ivesme adjuss back early 47% of disequilibrium of previous period s shock o he log ru equilibrium i he curre year. Goverme developme expediures mus be improved, o miimize he cos of producio of privae secors which icrease he profiabiliy of he ivesors. So developme expediures mus be improved o suppor he privae ivesme. Similarly goverme should make effors o use aid for he developme projecs which helps o appreciae privae ivesme. Refereces Amjad, R. (1976), A Sudy of vesme Behavior i Pakisa, , The Pakisa Developme Reviews, 26(4). Aslam, N. (1987), The mpac of Foreig Capial flow o vesme: he Case of Pakisa, Pakisa Developme Review, 26(4). Acosa, P. ad Loza, A. (2005) Shor ad Log Ru Deermias of Privae vesme i Argeia eraioal Trade, Uiversiy of Noigham s, No Ramirez, M.D. (1994) Public ad Privae vesme i Mexico : A empirical Aalysis: Souher Ecoomic Joural 61, Shabbir, T. ad Mahmood, A. Joural of Applied Ecoomics, Vol, No Ecoomics Survey (Various ssues), Goverme of Pakisa, Fiace Divisio, Ecoomic Adviser s Wig, slamabad. Mira, P. (2006), Has Goverme vesme Crowded ou Privae vesme i dia? eraioal Moeary Fud, h Sree N, W., Washigo, DC Naqvi, Naveed H. (2002) Crowdig ou or Crowdig i? Moldig he Relaioship bewee Public ad Privae Fixed Capial Formaio. The Pakisa Developme Review 41: Ouaara, B. (2004) Deermias of Privae vesme i Seegal Ceer for Research i Ecoomic Developme ad (1992) The Effecs of Privae vesme i Pakisa The Pakisa Developme Review, pp Servior, E. ad Jayarama, T.K. (2001) Deermias of Privae vesme Ecoomic Deparme Reserve Bak, Pp Zaree, (1991) Deermias of Privae vesme i Pakisa The Pakisa Developme Review, pp

5 eraioal Joural of Busiess ad Social Sciece Vol. 3 No. 4 [Special ssue - February 2012] Appedix: Table1: Resuls of ADF es Real eres Rae (2.949) Real GNP (-2.944) Goverme Reveue Goverme vesme LEVEL 1 s DFEERENCE ercep Tred & ercep ercep Tred & ercep * * (-3.516) (-2.955) (-3.556) (-2.974) (-2.94) AD (-2.947) Privae vesme (-2.94) Lag (0) (-3.538) (3.542) Lag (0) * (-2.947) * (-2.985) * (-2.947) * (-2.949) 6.499* (-2.949) * * ( ) * ( ) * (-3.546) 6.329* (-3.156) *MacKio criical values for rejecio of hypohesis of a ui roo idicae a 5% sigificace level ( Esimaed Log Ru Resul Table 2: Johase Co-iegraio Tes for Public vesme Maximum Eige value Like hood Raio 5% Criical value Hypohesis No of CE(s) Noe ** A mos 1** A mos A mos A mos 4 G = GNP GR AD+1.072P - Value 2.37** 4.28** 2.29** 5.54** 1.822** Table 3: Error Correcio Variables Co-efficie Sd-Error -saisics G (-1.800)** GR 1 P ** (0.184) (1.884)** Aid 1 RGNP 1 EC (1.352) (1.868)** (0.0633) ** LM Tes 0.43 Ramsey Rese Tes ** Sigifica a 5% 187

6 The Special ssue o Behavioral ad Social Sciece Cere for Promoig deas, USA Table 4: Johase Co-iegraio Tes for Privae vesme Max Eige value Like hood Raio 5% Criical value Hypohesis No of CE(s) Noe ** A mos 1** A mos A mos 3 ** deoes rejecio of he hypohesis a 5% sigificace level P = GNP RR 1.175G - Value 1.55** 2.06** 1.937** 4.802** Table: 5 Error Correcios Variables Co-efficie Sd-Error -saisics P * GNP 1 RR 1 G 1 EC * ** LM Tes Ramsey Rese Tes 1.63 ** Sigifica a 5%.* Sigifica a 10%.* **Sigifica a 1% CUSUM of Squares 5% Sigificace Fig (1) Goverme vesme CUSUM of Squares 5% Sigificace 188 Fig (2) Privae vesme