Public and private investment in economic growth

Md Monirul Islam | Published: March 08, 2019 21:32:45 | Updated: March 12, 2019 22:06:56

Economic growth as well as development of an economy bank predominantly on the capability to invest and utilise resources efficiently. In case of Bangladesh, both public and private investments have been instrumental to stimulate economic growth. 

As a developing country of South Asia, Bangladesh has been witnessing socio-economic and political perils and natural calamities since its birth. Despite these, the country has been progressing steadily for the past one decade as it continues to maintain its average growth rate at more than 6 per cent. Last year, the country fulfilled the eligibility requirements to graduate from 'Least Developed Country' to 'Developing Country' status. Bangladesh is now on its way to become a middle income country by 2021 and a developed one by 2041. The series of schemes and projects taken by both the government and the private sector has been helping the economy to achieve the rank of the 44th country in terms of gross domestic product (GDP) across the world.

Some studies have shown that public and private investments have twin impacts on economic growth, which may be positive or negative through crowding-in and crowding-out effects respectively. Here Keynesians are the advocate of public investment. They feel that public investment has been the tool of government to increase the aggregate production of an economy by accelerating employment opportunities, building infrastructure, providing energy and other capacity-enhancing human resource development projects and initiatives. In this process, public investment acts with a multiplier effect on output. On the contrary, the neoclassical school of thought states that private investment has significant effect on economic growth in both short and long runs. 

Over the last decade, Bangladesh has taken different mega projects by employing public investment. Economists are yet to determine if public investment in Bangladesh is helping to stimulate private investment through crowding-in. In this backdrop, a study was conducted by Bangladesh Institute of Governance and Management (BIGM), Dhaka in 2018, to investigate the effect of public and private investment on economic growth in Bangladesh by using time series data over the years 1980-2017. The study employed an Auto Regressive Distributive Lag (ARDL) economic technique by choosing the best possible lag for all the variables. It used GDP growth as the dependent variable, and public and private investments as independent variables. Besides, the terms of trade (TOT) was taken as an instrumental variable in the study. The study results demonstrated that in the long run public investment has higher impact than private investment on GDP growth. Nevertheless, the long-run association of public and private investment with GDP growth has proved that these two types of investments have differential impact on GDP growth.

According to the VAR-based Granger Causality test used in the study, the relationship between public investment and GDP growth is bidirectional at 5 per cent level. On the other hand, there exists unidirectional association from private investment to GDP growth and from public investment to private investment respectively at one per cent level -- meaning private investment encourages GDP growth and public investment leads to an increase in private investment. The existence of the effect of public investment thus brings about crowding-in effect on private investment in the context of Bangladesh.

In recent years, the government of Bangladesh has been emphasising on public investment to attain higher GDP growth. The aforementioned study has shown that the potentials of private investment increase significantly via public investment as the latter can crowd-in private investment and make it more effective for the growth process of a country like Bangladesh. In this regard, increase in public investment is crucial to move to the next level of economic growth for the country.

Md. Monirul Islam is Assistant Professor at the Bangladesh Institute of Governance and Management (BIGM). monirul.islam@bigm.edu.bd

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