THE EFFECT OF PUBLIC AND PRIVATE INVESTMENT ON ECONOMIC GROWTH IN DEVELOPING COUNTRIES

Abstract

Investment in the economy has been acknowledged as a driver for economic growth in various countries; however, the question of which type of investment, between private investment and public investment contributes more to economic growth has long posed a dilemma. The primary objectives were to examine the effect of public and private investment on economic growth of Tanzania. The study was guided by three specific objectives: assess the influence of public investment on the economy of Tanzania, examine the relationship between private investment and economic growth and assess the causal relationships between the public and private investment on economic growth. The researcher employed time-series data from 1990 to 2023, data were extracted from World Bank Development Indicator database. The study employed the Dynamic Ordinary Least Squares (DOLS) method to estimate long-run relationships and the Error Correction Model (ECM) to capture short-run dynamics. Additionally, the Granger Causality Test was used to analyse the directional causality between the variables. The findings reveal that public investment has a positive and significant long-run effect on economic growth but exerts a negative impact in the short run, likely due to implementation delays and initial costs. On the other hand, private investment positively influences both short-term and long-term economic growth, with stronger effects in the long run. The Granger causality test results suggest that economic growth Granger-causes private investment, but private investment does not cause immediate growth in the short run. The study concluded that, public investment has significant long-run effect on economic growth but exerts a negative impact in the short run. Based on these findings, the study recommends that policymakers should focus on improving the efficiency of public investment projects, enhancing the business environment to attract more private investment, and fostering public-private partnerships to maximize the economic benefits of both types of investment