Measuring The Effects Of Public Expenditures And Macroeconomic Uncertainty On Private Investment: The Case Of Pakistan
This study is an attempt to investigate the impact of public expenditures and macroeconomic uncertainty on private fixed investment in Pakistan over the period 1972 to 2005. Attention has been focused on highlighting the theoretical aspects of the determinants of private investment, the existing literature is reviewed for empirical evidences, and the validity for Pakistan is examined. The conclusion emerging from the survey of the literature shows that the effect of the determinants of private investment is an unsettled issue at least at the empirical level. The analysis focuses on the impact of public expenditure and uncertainty on investment for the economy as a whole, as well as in the leading sectors of the economy namely: agriculture, large-scale manufacturing and services. The Johansen and Juselius multivariate cointegration technique is applied. Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) univariate tests are applied to determine the order of integration of each variable. A formal test of cointegration was carried out following the Johansen (1988). After testing for unit roots and cointegration, the Error Correction Model (ECM) specification was derived. The general to specific methodology advocated by Hendry (1986) was applied in the determination of the model specification. The Brush-Godfrey (1981) LM test of serial correlation, White (1980) Heteroskedasticity test, Engle (1982) ARCH LM test; Brown, Durbin and Evans (1975) Cusum and Cusum of Squares test of stability are satisfied, which depicts the accuracy and the correctness of the results and the model. The results of the study support the proposition that public development expenditures lead to an enhancement of the private investment in the economy as a whole, as well as in the three leading sectors; agriculture, large-scale manufacturing and IX services. The study also shows that public non-development expenditures have a considerable negative effect on the private fixed investment over the long run. This may be interpreted as the confirmation of the view that a large government size is an obstacle to initiate the investment activities in the private sector. Macroeconomic uncertainty is one of the important determinants of investment. The proxy used captures both political and macroeconomic instability. The results obtained provide support to the hypothesis that there is a negative relationship between uncertainty and private investment. The results of the study also strongly support the view that private investment accelerates when there is an increase in the income level. It can also be argued that larger the size of market, higher will be the private investment in the economy on the whole as well as in the leading sectors of the economy i.e., agriculture, large-scale manufacturing and services. The empirical findings support the proposition that lower interest rate results in higher private investment in the economy as it reduces the cost of production and increases the profitability of the private investors. The empirical findings of the study suggest that the public authorities need to be aware of the fact that their expenditure policies have a direct bearing on private investment and hence need to be carried out carefully. To promote private investment special attention may be paid to increase public development expenditures with a focus to minimize the cost of production of the private sector, which increases the profitability of the investors. Supervisor Dr. Faiz Bilquees Joint Director Pakistan Institute of Development Economics Islamabad Co-Supervisor Dr. Abdul Qayyum Associate Professor Pakistan Institute of Development Economics Islamabad
Meta Data
Related Thesis
Visit Us
-
Monday to Friday:
8:00 am – 4:00 pm - Tel: +92-51-9248074, Fax: +92-51-9248065
- [email protected], [email protected]