Political and economic determinants of private investment

2007

This paper shows for a panel of 32 developing countries that political and governance institutions matter for private investment decision. This linkage is empirically verified for a broad number of institutions. This is the case for corruption, quality of bureaucracy, judiciary, security of property rights, regulations and taxation, political stability, as well as political rights and civil liberties. This result is obtained by estimating a simultaneous model of private investment and political and governance quality, where economic policy and other variables explain concurrently both variables. In MENA, the deficiencies in the administration quality, the political instability and the low public accountability contributed significantly to the low investment decisions of the 1980s and the 1990s. This paper shows as well that, although political and governance institutions constitute first order importance for private investment, economic reforms in the form of financial development and trade openness, and human capital affect private investment decision directly, as well as by enhancing the quality of political and governance institutions.

2007

It is a widely held opinion that the resumption of growth in Africa will require, among other things, an increase in investment, which will have to come primarily from the private sector if growth is to be efficient and sustained. Using a simple neoclassical investment model, we examined the impact of political instability on private investment. The OLS estimates indicate

Economica, 2003

Although in theory the long-run effect of uncertainty on investment is ambiguous, available econometric evidence widely supports a negative association between aggregate investment and political instability. A shortcoming of this body of evidence is that it has failed to investigate the existence and direction of causality between these two variables. This paper fills this gap by testing for such causal and negative long-run relationship between political instability and investment. We find there is a causal relation going from instability to investment, but it is positive and particularly strong in low-income countries. This finding is robust to various sensitivity checks.

This study investigates the relationship between political instability and domestic private investment in Pakistan for the period 1972-2009. The ARDL co-integration approach and Error Correction Model are employed to examine the existence of long-run relationship between political instability and domestic private investment as well as short-run dynamics of domestic private investment respectively. Results show that political instability has significant negative relation with domestic private investment both in long-run and short-run. Public sector investment and FDI crowd in domestic private investment. Based on the findings of the study it is suggested that there should be a stable political environment so that the structure of the financial system and all sectors of the economy can flourish in a good way and domestic as well as foreign investors avoid to hesitate while investing in the economy. The role of the financial institutions and financial intermediaries in enhancing the credit to the private sector should be increased and the financial institutions should improve their monitoring.

There is an ample amount of work on private investment for the cases of both developed and developing economies. Blejer and Khan (1984) study the investment function for developing countries using pooled data of 24 countries for the period 1971-1979. They find credit availability and infrastructural public investments are positively related to private investment. They observe that crowding-out phenomena works in case of noninfrastructural investment. As quoted by Saker (1993), behavior of private investment is quite different in developed and developing economies. Credit availability and government investment appear to be strong boosters of private investment in case of developing economies. Utilizing the Pakistani data set from FY 1974 to FY 1992, Saker (1993) concludes that private investment is positively correlated with output growth, private sector credit availability and government infrastructural investment. Oshikoya (1994) models private investment function for various middle-income and low-income African countries for the period 1971-1988. He finds that real output growth, real exchange rate, credit availability and government infrastructural investment are positively related to domestic private investment in studied African countries. Inflation and external debt servicing add to macroeconomic uncertainty and are, therefore negatively related to private investment.

The aim of this paper is to identify the effect of political instability on investment and economic growth. By using a dynamic balanced panel data model applied on annual data from 11 countries from the Middle East and North Africa (MENA) region over the period of 2000 to 2009. The political instability’ effect on the contribution of investment to economic growth has been the subject of a second empirical study within the framework of this research paper. The main outcomes drawn by these two empirical tests prove that there is no effect of political instability on investment and economic growth and a negative interaction between political instability and investment.

HAL (Le Centre pour la Communication Scientifique Directe), 2007

This paper addresses the issue of the low level of private investment in the MENA region, with special emphasis on the role of governance. Based on the existing literature, we have categorized what types of governance institutions are more detrimental to entrepreneurial investments. We have then estimated a simultaneous model of private investment and governance quality where economic policies concurrently explain both variables. Our empirical results show that governance plays a significant role in private investment decisions. This result is particularly true in the case of "Administrative Quality" in the form of control of corruption, bureaucratic quality, investment-friendly profile of administration, and law and order, as well as for "Political Stability". Evidence in favor of "Public Accountability" seems, however, less robust. Our estimations also stress that structural reforms-such as financial development and trade openness-and human development affect private investment decisions directly, and/or through their positive impact on governance. These findings bring new empirical evidence on the subject of private investment in the developing world and in MENA countries in particular.

2011

During the 1980s and the 1990s, private investment in the Middle East and North Africa (MENA) has on average shown a decreasing or stagnant trend. This contrasts with the situation of the Asian economies, where private investment has always been more dynamic. In this paper, it is empirically shown for a panel of 39 developing economies-among which four MENA countries-that in addition to the traditional determinants of investment-such as the growth anticipations and the real interest rate-government policies explain MENA's low investment rate. Insufficient structural reforms-which have most of the time led to poor financial development and deficient trade openness-have been a crucial factor for the deficit in private capital formation. The economic uncertainties of the region have represented another factor of the firm's decisions not to invest. These uncertainties have consisted of the external debt burden and various measures of volatility.

Applied Economics, 2009

During the 1980s and the 1990s, private investment in the Middle East and North Africa (MENA) has on average shown a decreasing or stagnant trend. This contrasts with the situation of the Asian economies, where private investment has always been more dynamic. In this paper, it is empirically shown for a panel of 39 developing economies-among which four MENA countries-that in addition to the traditional determinants of investment-such as the growth anticipations and the real interest rate-government policies explain MENA's low investment rate. Insufficient structural reforms-which have most of the time led to poor financial development and deficient trade openness-have been a crucial factor for the deficit in private capital formation. The economic uncertainties of the region have represented another factor of the firm's decisions not to invest. These uncertainties have consisted of the external debt burden and various measures of volatility.