[Paper Review] Impact of Public and Private Investments on Economic Growth of Developing Countries

Faruque Ahamed|arXiv (Cornell University)|May 28, 2021

Fiscal Policy and Economic Growth4 citations

TL;DR

This study examines the impact of public and private investments on economic growth in 39 developing countries from 1990 to 2019 using panel data and neoclassical growth models. It finds that public investment has a stronger positive effect on economic growth than private investment, with gross capital formation, labor growth, and government final consumption expenditure significantly contributing to growth.

ABSTRACT

This paper aims to study the impact of public and private investments on the economic growth of developing countries. The study uses the panel data of 39 developing countries covering the periods 1990-2019. The study was based on the neoclassical growth models or exogenous growth models state in which land, labor, capital accumulation, etc., and technology proved substantial for economic growth. The paper finds that public investment has a strong positive impact on economic growth than private investment. Gross capital formation, labor growth, and government final consumption expenditure were found significant in explaining the economic growth. Overall, both public and private investments are substantial for the economic growth and development of developing countries.

Motivation & Objective

• To assess the relative contributions of public and private investments to economic growth in developing countries.
• To examine the role of key macroeconomic variables—gross capital formation, labor growth, and government final consumption—in driving economic growth.
• To evaluate the validity of neoclassical growth models in explaining growth dynamics in developing economies.
• To provide empirical evidence on investment efficiency and policy implications for development strategies.

Proposed method

• Empirical analysis using panel data from 39 developing countries over the period 1990–2019.
• Application of the neoclassical growth model as the theoretical framework to analyze the determinants of economic growth.
• Estimation of a fixed-effects panel regression model to control for unobserved country-specific heterogeneity.
• Inclusion of control variables such as labor growth and government final consumption expenditure to isolate investment effects.
• Use of standard econometric techniques to test for significance and robustness of investment channels.
• Data sourced from international databases, with variables measured in real terms and adjusted for inflation.

Experimental results

Research questions

• RQ1 What is the relative impact of public investment versus private investment on economic growth in developing countries?
• RQ2 How do gross capital formation and labor growth influence economic growth in developing economies?
• RQ3 To what extent does government final consumption expenditure contribute to economic growth?
• RQ4 Do public investments generate higher growth returns than private investments in developing country contexts?
• RQ5 Are the predictions of the neoclassical growth model empirically supported in developing country panel data?

Key findings

• Public investment has a significantly stronger positive impact on economic growth than private investment in developing countries.
• Gross capital formation is a statistically significant driver of economic growth across the sample of developing countries.
• Labor growth contributes significantly to economic expansion, indicating the importance of demographic and human capital factors.
• Government final consumption expenditure is also a significant determinant of economic growth in the studied countries.
• The combined effect of public and private investments is substantial, reinforcing the need for balanced investment strategies.
• The results support the relevance of neoclassical growth models in explaining growth dynamics in developing economies.