Do poor institutions cause public investment to crowd out private investment in Africa?

Abstract

Abstract Private investment is an important catalyst of long-term growth. In addition to its direct effect on output, it incorporates technical progress which is of paramount importance to the growth of total factor productivity. This work investigates empirically the effect of public investment along with measures of the quality of institutions on private investment share in GDP using system GMM estimators for the case of African countries. Besides, it studies the interaction between different measures of the quality of institutions with the level of public investment. The main results show that improvements in the share of public investment, in most specifications, are associated with lower levels of private investment. That is to say, public investment crowds out private investment. However, the interaction of institutional quality and public investment has a positive impact on private investment. In other words, higher institutional quality causes public investment to crowd in private investment.