Interactions between public and private investment: Evidence from developing countries

This study examines the linkages between public investments and private investments by using Granger-causality and cointegration tests and probit analysis in a sample of 25 developing countries. The results from the cointegration and Granger-causality tests are further analysed in a probit framework by assigning the dependent variable the value '1' for the 'crowding-out' cases and '0' otherwise, and the explanatory variables are various components of Gwartney and Lawson's (2004) economic freedom of the world index. Using this approach, we find that the higher the share of government involvement in an economy, the lower the trade openness; the more restrictions there are on the use of foreign currencies, and the more stable and developed the macro and monetary environment is, the higher the likelihood that public investments may crowd out private investments. The model correctly predicts 10 out of 11 cases of crowding-out and 13 out of 14 cases of no-crowding-out.