Public Sector Deficits and Private Investment: A Test of the Crowding-out Hypothesis in Pakistan's Manufacturing Industry

Robert E. Looney
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Robert E. Looney: National Security Affairs, Naval Postgraduate School, Monterey, California, USA.

The Pakistan Development Review, 1995, vol. 34, issue 3, 277-297

Abstract: The purpose of the analysis below is to assess whether this public sector crowding out of investment in manufacturing has been a major factor affecting the pattern of private capital formation in that sector. The results of modified Granger Causality test suggest that expanded public investment in infrastructure has not played an important role in stimulating private investment in industry. If anything, it appears that private investment has stimulated a follow-on expansion in infrastructure. Instead of crowding in (i.e., a positive feedback effect) additional private investment, infrastructure investment appears to have led to larger deficits and domestic borrowing. In turn, these financial developments have dampened the flows of private capital into the important large-scale manufacturing sector. On the other hand, financial crowding-out of private investment in large-scale manufacturing is a distinct possibility; but it may not be a simple, straight-forward process. The results obtained also suggest that private investment in large-scale manufacturing has suffered from real crowding-out associated with the government's noninfrastructural investment programme. Finally, it should be noted that neither financial nor real crowding-out seems to occur in other areas of private investment. Clearly, further research should be undertaken to determine why the large-scale manufacturing sector is unique in this regard.

Date: 1995
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