public expenditure and private investment in cameroon. a...

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online International Monthly Journal (ISSN: 2306-367X)

Volume:2 No.4 October 2013

818

www.globalbizresearch.com

Public Expenditure and Private Investment in Cameroon.

A Vector Autoregressive Approach

Njimanted Godfrey Forgha, Ph.D

Associate Professor of Economics,

Department of Economics and Management,

University of Buea, SWR.

E-mail: [email protected]

Mukete Emmanuel Mbella,

Graduate Research Assistant,

Department of Economics and Management,

University of Buea, SWR.

E-mail:[email protected]

___________________________________________________________________________

Abstract

The economy of Cameroon has witnessed double digit trend of economic growth before 1986,

as public expenditure exerted significant expansion in the size of public sector and a declined

period after 1986 characterised by government deficit expenditure. With the declining

economy, the government of Cameroon forcefully used desperate measures to reduce

expenditures and revenue respectively. These affected key economic indicators in Cameroon

especially private investment. It is on this ground that a study of this nature is designed to

investigate the relationship between public expenditure and private investment in Cameroon

and the nature of the causality between them. Based on secondary data from World Bank

database between 1980 -2012 complemented by other sources, using the Vector

Autoregressive technique of estimation, we found that public expenditure insignificantly

crowds in private investment. Based on this finding, we recommend the complementary

developmental roles of the government and those of the private sectors, emphasizing that the

government of Cameroon should focus on infrastructural development and maintenance,

quality education and research, industrialization, good governance and security at the

expense of superfluous expenditure which are political driven with no economic valuation.

___________________________________________________________________________

Keywords: Public Expenditure, Private Investment, Crowding in, Crowding out, Good

Governance and Infrastructural Development.




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1. Introduction

The links between public spending and private investment are controversial in

macroeconomics; if inspirations are drawn from the works of Voss (2002) and kustepeli

(2005) which show a crowding out effect contrary to those of Atukeren (2004) and Odedokun

(1997) which indicate a crowding in effect of private investment. These have strong

implications in determining government growth promotion policies (Kollamparambil and

Nicolaou, 2011). This is true for developing countries where high level of investment is a

precondition for sustained economic growth (Blejer and Khan, 1984).

Theoretically, the Neo-classical economist talks of crowding out of private investment by

public investment when the state increases its investment in any economy through public debt

and rising taxes. Kustepeli (2005) argues that public investment finance by public debt draws

liquidity out of the market and for a given level of money stock drives interest rates up. Based

on the Neo-classical assumption of full employment, this directly translates into a rise in the

cost of borrowing that is used in financing new investment. Going by the above consensus,

private investment is declared unprofitable. Also, public investment financed by taxes distorts

relative prices leading to misallocation of resources most of which are generated from the

investment projects taken up by private sector and pump into alternative uses that appear

relative cheaper (Atukeren, 2004). In addition to this, a tax increase will diminish after tax

returns on private investment which will cause it to fall. This therefore implies that by the

neo-classical hypothesis, public spending crowds out private investment.

The Keynesians calls for state intervention and in a state of less than full employment, the

interest sensitivity of investment is assumed to be low. Under such circumstances, the

standard IS-LM model predicts that investment should reduce in responds to a positive

government shock; an increase in government consumption leads to an increase in interest

rate which intend will translate into a decrease in investment. Therefore, Keynes and its

associate are of the view that public investment crowds in private investment.

It is therefore clear that these theoretical predictions are orthogonal. These contrasting

views gave rise to several empirical studies attempting to assess the impact of public

expenditure on private investment. Unfortunately, the predictions of the empirical evidence

are also mixed up in support of one theory or the other. While studies like those of Furceri

and Sousa (2009), Gatawa and Bello (2009), Kim and Nguyen (2012), Nazmi and Ramirez

(1997), Voss (2002), Mitra (2006), Bende-Nabende and Slater (2003), Kustepeli (2005),

Rossiter (2002) and Wai and Wong (1982) indicate a crowding out effect, those of Fielding

(1997) and Fedderke et al. (2006), Elden and Holcombe (2005), Atukeren (2004), Greene and




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Villanueva (1991), Erenburg (1993), Ramirez (1994), Odedokun (1997), Ghassan and Al-

Dehailan (2008) found evidence of crowding in, effect of private investment.

Based on the Ricardian Theorem, an increase in budget deficits is expected to be

accompanied by an increase in future taxes (kustepeli, 2005). This follows that government

finance investment through public debt is expected to be repaid by revenue generated by taxes

in the future. Hence, interest rate and private investment are left unchanged as economic

agents realised that their income will be taxed in the future. As a result, private investment is

neither crowds in or crowds out indicating that private investment and public investment

behave indifferent. The monetarists argue that increase in money supply accompany with

government expenditure will have an expansionary effect on the private sector. It should be

noted that it is this controversy of the crowding out, crowding in effects of public spending on

private investment that interest economists and policy makers given the proposition that

private sector growth is the engine of economic growth and development.

The Cameroonian economy being a mixed system implies that private and the public

sectors must play complimentary roles to enhance economic growth and development. The

rate of private and public investment in Cameroon can be trace right back in the pre-oil era

(1963-1977) when agriculture was the main economic activity of the country. Public

investment as a ratio to GDP was 2.4% while private investment was higher and stood at 15%

of GDP (Ghura, 1997). Within this period, government expenditures on education, health,

agriculture and communication (real sector) as a percentage to total government spending

ranges from 11.5% -11.7%, 9.1% - 5.1%, 3.3% - 3.6%, 3.4% - 2% and 12.4% - 9.3% with a

percentage change of 0.2%, -44.3%, 8.9%, -40.4%, and -24.9% respectively. Whereas

government spending in the military (non-performing sector) within the same period was

between 12.4% - 9.4% and a percentage change of -24.9% (Amin, 1998, it should be noted

that, throughout this period, defence had the largest share of government spending amounting

for almost 21% in 1963. Between 1978 and 1986, public investments as a ratio of GDP

increased to 10.5%. The increase in public investment is explained by the developmental

strategy adopted by the government to expand the public sector in three ways; by shifting its

expenditure priorities through expanding the capital budget from an average of 2% of GDP to

an average of 9% while reducing current outlays to an average of 12% of GDP, setting up of

public agencies and public enterprises in all sectors of the economy and lastly, the

development of the transport sector (Ghura, 1997). As a result of this, public spending in

sectors like education, health, agriculture, communication and defence dropped from the

previous period to 11.9%, 4.1%, 2.9%, 1.5%, and 7.5% giving an overall negative percentage

change for all the sectors being 2.5%, 19.1%, 14.9%, 24.3%, and 21.2% respectively (Amin,




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1994). Based on this, private investment witness a slight increased from 15% in the previous

period to 16.1% in this same period.

Over the period 1987 to 1993, public investment ratio to GDP witnessed a decline from

10.5% to 1.8% whiles the ratio of private investment declines also to an annual average of

11.2% (Ghura, 1997). During this period, the government carried out series of strategies

among which includes the tightening up of fiscal policy, privatisation of public enterprise,

bank restructuring and liberalisation of domestic prices and interest rate. It is therefore clear

that by the end of 1993 internal adjustments were not sufficient to remove the economy out of

this dismal performance. So the CFA franc that was peg to the French Franc in 1948 was

devalued on the first of January 1994 with the expectation that real GDP will increase from an

average decline rate of 4% to an average increase of 3.5% during 1994 – 2003 (Khan, 2004).

Public investment ratio to GDP was 1.5 % in this same period, with government spending in

real sectors of the economy increasing (that is, education increases to 14.1%, health increases

to 4.5%, agriculture to 4.8%, communication to 5.5% and even the non performing sector also

witnessed an increased to 9.2%. As a result of this, Private investment ratio to GDP increases

to 13.4% (ECA, 2001)

UNESCO Institute of statistic (2012), resolves that government expenditure on education

was 17.89% as of 2010, its highest value over the past 39 years being 21.26% in 1976. Within

this same period, public spending on health amounted to 8.5% of total government spending

in 2010 and public expenditure on defence was 6.8% in 2007 from 12.8% in 2001 (World

bank Report, 2012). It can be observed that while government expenditure on education and

health have recently increase their share on the total budget, that of defence has never gone

below 21% of public spending since 1963. The share of agricultural expenditure in total

public expenditure has a range of 3% to 9% since 1961. As a result of this, private investment

as a ratio of GDP declined from 18.1% in 2001 to 12.7% in 2012.

One thing that stands out clear is the fact that domestic capital formation has been carried

out by the private sector in Cameroon and that public capital formation has never attained

50% even during the oil boom era. From the above view of public and private investment in

Cameroon, it should be recalled that until the advent of liberalisation of the economy most of

the productive units were in the hands of the government. This follows the emergence of the

Structural Adjustment Programme (SAP) in 1989 were commercialisation and privatisation

were encouraged, and the embracing of globalisation less than two decades ago. With the

advent of privatisation, the government has the role of regulating the economy and in

situations where the private sector cannot function well due to low profit, the government

have to step in and play a complementary role. However, experience have shown that there




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are certain government projects that do not encourage growth or that do not crowd in private

investment, among which include, expenditures on military during war and political

affiliation.

The government of Cameroon has modified its investment ordinance since 1960. The

investment in Cameroon is governed by Ordinance No. 90/7 of 8 November 1990 and its

subsequent amendments to suit the co-existence of the government and the private sector. The

first investment policy (1984-1990) upholds government determination to encourage the

involvement of the nations in small and medium size enterprises. The second investment

policy (1990-2002) was launched to adapt to the new liberal economic environment due to the

implementation of SAP. To support this, the National Industrial Free Trade Zone Board and

the Management Unit were created. Within these structures, any manufacture or service

industries authorised by the zone administrative body can import their means of production,

equipments and raw materials free of duty given that more than 20% of their annual turnover

crosses the zone boundary into Cameroon Customs territory (BEAC, 2005). Zone users were

exempted from exchange control, paying of taxes for a period of ten years and can freely

export their proceeds from investment. The third investment policy was passed with the

investment chartered defined by law No. 2002/004 of 19 April 2002. This chartered passed by

parliament aims at including the spirit of community investment and to attract foreign capital.

Given the fact that a lot have been put in place with the expectation to increase the rate of

investment and growth in Cameroon to no avail, then this study is designed to bring forth

answers to the following questions; what relationships have actually existed between public

expenditure and private investment in Cameroon? Are there any causality between

government expenditure and private spending in Cameroon? Therefore, this study is out to

investigate into the nature of the relationships between public expenditure and private

investment in Cameroon, and the nature of causality between government expenditure and

private spending in Cameroon. This is conducted under the null hypotheses that there are no

statistical significant relationships between public expenditure and private investment in and

no significant causality between government expenditure and private spending in Cameroon,

While studies conducted in this area have mixed conclusions, a careful evaluation of these

studies revealed the existence of some limitations. That is some of the related studies have

drawn their conclusion from the used of OLS, pair wise correlation analysis, among other

methodologies that are not suitable for data analysis in developing countries. This work has

overcome these difficulties by adopting the Structural Vector Autoregressive (VAR)

technique based on its conditionality.




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Haven exhausted section one of this work, the rest of this paper therefore is organised as

follows; the second section looks at the empirical and theoretical literatures, followed by the

analytical methodology in section three, while section four deals with the summary of

empirical results section five provides policy recommendations and conclusion.

2. Literature Review

Studies on public investment and private investment are centred on either accepting or

rejecting the crowding out hypothesis. The theoretical evidences discussed above show that

the results are controversial. Kim and Nguyen (2012) examined the effect of public sector

spending on private sector investment not through the traditional channel of interest rate and

tax but through the labour channel based on the fact that federal funds allocated to the local

government are largely dependent on the local population level. Their results revealed strong

evidence that an exogenous increase in the federal spending reduces both firms’ capital

investment, that is, a crowding out effect. The effect of government spending is more

pronounced among firms that are smaller in size, more geographically concentrated and

located in regions with high employment rate.

Furceri and Sousa (2009) analyse the impact of government spending on private sector,

assessing the existence of the crowding out versus crowding in effects. With the help of a

panel data from 1960 to 2007, their findings show that government spending produces

important crowding out effects, by negatively affect both private consumption and private

investment.

Atukeren (2004) in understanding the relationship between public and private investment

used granger causality methodology for a sample of twenty five developing countries in

Africa, Asia and Latin America over the period 1970-2000. His results indicate that public

investment crowds in private investment. With the used of the probit model, he found out that

the higher the share of government involvement in and economy, the lower the trade openness

and the more stable the macro and monetary environment are the higher the likelihood that

public investment may crowds out private investment.

Erden and Holcombe (2005) examined the effect of public investment on private

investment in developing economies by applying several pooled specification in a standard

investment model to a panel of developing countries for 1980 to 1997, they observed that,

public investment complement private investment although private investment is constrained

by the availability of bank credit. The same empirical models are run on a panel of developed

countries. In contrast to developing economies, public investment crowds out private

investment in developed economies.




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Kollamparambil and nicolaou (2011) uses quarterly data from 1960 to 2005 to analyse the

nature and relationship between public expenditure and private investment in South Africa.

They found out that although public investment is not crowding in or crowding out private

investment it exerts and indirect impact of private investment through the accelerator effect.

As a result of this, they recommended that a more proactive fiscal policy is suggested to

increase the investment- GDP ratio which can stimulated higher growth rates.

Ghassan and Al-Dehailan (2008) investigates the long-run equilibrium relationship

between real private investment and public investment in Saudi Arabia over the period 1968

to 2006 using a threshold co-integration test which allows for asymmetric adjustment. Their

findings show that the stability of private investment effort: that the increase in public

investment boosts private investment below threshold parameter.

2.1 Theoretical Literature

Most investment theories have their origins from Keynes’(1936) intervention in

macroeconomic issues when he argues that investment depends on the marginal efficiency of

capital, relative to interest rate which is the opportunity cost of capital. His emphasis was on

the volatility of private investment given that investors cannot predict with certainty the

returns on investment. An important feature of Keynesian theory is that, although saving and

investment must be identical ex-post, savings and investment decision are in general taken by

different decision makers and there is no reason why ex-ante saving should equal ex-ante

investment. The next phase in the evolution of investment theory gives rise to the Accelerator

Theory. Keynes has traditionally favoured the accelerator theory while disregarding the role

of factor costs that was the land mark development in the theory of investment.

The Flexible Accelerator model based on the fact that the larger the capital between the

existing capital stock and the desire capital stock the greater a firm’s rate of investment. The

notion is that firms plan to close a fraction the gap between the desired capital stock, Ҟ+, and

the actual capital stock at the beginning of year 1, қ-1, in each period. Hence the net

investment equation is given as:

I = δ (Ҟ+ – қ-1)

Where I= net investment, қ+= desired capital stock, қ -1= capital stock of the previous period

and δ= partial adjustment coefficient.

It has been argued that variables such as output cost of external financing, internal funds,

and other variables may be included as determinants of desire capital stock (Asante, 2000).

He noted that the flexible accelerator model may be transformed into a theory of investment

behaviour by adding a specification of қ+ and a theory of replacement investment. In the

flexible accelerated model, қ+ is proportional to output, but in alternative models, қ

+ depends




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on the variables suggested by Asante (2000). Mankiw (1992), noted that net investment

depends on the difference between the marginal product of capital and the cost of capital. He

further explains that if the marginal product of capital exceeds the cost of capital, firms will

find it profitable to add to their existing stock but if otherwise, they let their capital stock

shrink.

3. Methodology

This study covers a period of 32 years (1980 to 2012) because it is within this period that

data for the study are available and also because this period has witnessed several policy

adjustments associated with government and private investments. A casual research design is

adopted in this work to ascertain the cause and effect relationship between our variables. This

work has also adopted a flexible accelerator framework unlike the works of Wai and Wong

(1982) and Hall (1977) which have shown the various shortcomings that are involve in using

a strict neoclassical investment model in developing countries. We used public and private

capital formation as a proxy for public and private investment. The model used in this study is

the augmented investment model adopted from Akpokoje (2000) which is build out of the

partial adjustment mechanism which explains private capital formation as;

∆Kt = β (K*t – Kt-1) ; With K

*t > Kt-1; But ∆Kt = 0 when K

*t ≤ Kt-1; Where ∆Kt is the net

investment, K*t is the desired capital stock, Kt-1 is the capital stock of the economy at the

beginning of period t, and βt is the adjustment coefficient or the speed of adjustment. The K*t

and βt are endogenously determined. From the above equations, we observe that actual private

capital adjusts to the difference between desired private capital in time t and actual private

capital in the previous years. This therefore implies that private capital formation can be

expressed as follows;

PC = (GC, IR, RGDP) ....3.1; Where PC is private capital formation, GC is public capital

formation, DC is domestic credit to private sector, IR is the real interest rate, and RGDP is

growth rate of real gross domestic income as a proxy for economic growth. In developing

countries with Cameroon inclusive, public investment in infrastructure like transport,

communication, education and energy can complement or crowds in private investment

because such projects tend to reduce the cost of production and raise the rate of returns on

private capital (Khan, 2006). This is in conformity with the Keynesian economists view. Also,

public investment which results in large fiscal deficits raises interest rates and this is expected

to have a negative impact on the speed of adjustment, hence crowds out private investment

(i.e the neo-classical view). This shows that the effect of GC on PC can be positive or

negative depending on which effect (complementary or substitution) is greater (Erden and

Holcombe, 2005).




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Furthermore, going by the Keynesians postulate, an increase in interest rate raises the cost

of capital which discourages investment hence a decline in desired capital stock. This implies

that there is an inverse relationship between desired capital stock and interest rate. Above all,

the real gross domestic income is used as a proxy of economic growth which determines the

level of productivity. This implies that the rate of real growth of output or income is an

indication of the rate of real growth of the economy (Gatatwa and Bello, 2010). Based on the

above our model is specified thus;

PCt = A0 + A1GCt + A2IRt+ A3GDPt + Ɛt.. 3.2; A0 ≠ 0, A1≠ 0 <, A2<0, A3>0,

In order to ascertain the impact of public investment on private investment in Cameroon,

we have employed the Vector Autoregressive (VAR) Model, which is an extension of the

Granger Causality test and allows one to go beyond the bivariate framework. This approach

involves performing a regression for a system of equations to examined the interrelationship

that exist between economics variables using minimal assumptions about the underlying

structure of the economy. The VAR equation contains lagged values of all the variables in the

system where all the variables are predetermined. The aim is to provide good statistical

representation of the past interaction between the variables. This technique of estimation was

introduced by Sim (1980) and is advantageous in the sense that the VAR methodology avoids

the imposition of potentially spurious a prior constraints that are employed in the specification

of structural models and also there is no issue of simultaneity since only lagged values of the

endogenous variables appear on the right hand side of the equation. The approach also has the

advantage of being easy to understand, and easily extended to non-linear specifications

models. Furthermore, another advantage of VAR can be seen from the study of Voss (2002),

where he points out that the best model in fitting the values of private and public investment

is that of VAR because one can examine the dynamic aspect of private and public capital

formation without having a full specified structural model. Also, Voss noted that the

endogeneity of public expenditure is acknowledged since it has to be in the study. Since the

VAR involves series of equations, it is assumed that each equation contains K lagged values

as such the equation could be estimated using the Ordinary Least Squares approach. Based on

the specification in (3.2) above, our VAR models could be presented thus:




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From the above, the estimated Ɛs are the stochastic error terms also called impulse or

shocks elements. This helps to provide a clear distinction between correlation and causality as

the impulse responds function. We have also logged the variables for direct estimation and

interpretation of the parameters as elasticities. The residuals, Ɛs, represent the unexplained

movement of the variables reflecting the influence of exogenous shock. It also represents a

composite of the various exogenous shocks affecting the endogenous variables in the model.

However, the standard VAR used in this work is limited to two lagged as explained by the

Lagged Distributive Model.

Prior to the estimation, we tested for stationarity of the variables using unit root test like

the Augmented Dickey Fuller and the Phillip Peron test, the NG peron e.t.c to check level of

stationarity of the included variables and to avoid spurious results. The granger causality test

like the Jurgenson Co-integration test is conducted to enable the result show the level of

causality between the variables used in the model given that the variables are stationary at the

same level. In determining the number of lagged used, the Akiake Information Criteria and

the Schwarz Criteria were employed. More so, because of the fact that serial correlation is a

major problem when using the VAR technique, this study uses the Braisch LM statistics and

the Portmanteau tests, to test for the existence of serial correlation.

4. Presentation and Discussion of Results

Pre the vector autoregressive results the stationarity tests of the variables are used in

our models. This is done by examining the graphs of the variables to ascertain whether

the variables have trends and if such trend exhibits random walk with drift or without

drift. Since the graphs are too many, they are not presented in this work due to space.

However, the graphs exhibit no particular trends within our period of study (1980-2012),

instead they are stochastic with drifts. Therefore, testing for stationarity of the variables

and order of integration without trend but with drift strongly support the hypothesis

that the variables used in our models are non stationary at levels but they achieve

stationary after their first difference. The results of the Unit Circle test no presented due to

space also indicates that the residuals of the various models are all integrated of the order one

1(1). This therefore implies that the variables in our models are co-integrated; meaning that




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long-run equilibrium relationship exists between them. These models are presented and

discussed below.

Table 1: Results of Vector Autoregressive Analysis for the Four Equations

Variables

Eq (1) DLog

(PC)

Eq (2) DLog

(GC)

Eq (3) DLog

(GDP)

Eq (4) DLog

(IR)

DLog PC(-1) -0.1456

(-0.5684)

2.181

(3.464)*

-0.0077

(-0.0924)

-0.1793

(-0.1506)

DLog PC (-2) -0.1707

(-0.5522)

0.815

(1.074)

0.0169

(0.1670)

-1.9020

(-1.3194)

DLog GC (-1) 0.0425

(0.4801)

-0.593

(-2.721)**

0.0040

(0.1393)

0.4568

(1.1055)

DLog GC (-2) 0.0451

(0.7235)

-0.157

(-1.022)

-0.0077

(-0.0924)

0.2681

(0.9212)

DLog GDP (-1) 0.8482

(1.0152)

5.397

(2.619)**

0.3392

(1.2426)

6.6747

(1.7128)***

DLog GDP (-2) -0.2068

(-0.2182)

3.508

(1.506)

0.3602

(1.1633)

0.4139

(0.0936)

DLog IR (-1) 0.0467

(0.7871)

-0.233

(-1.600)

-0.0335

(-1.7275)***

-0.0284

(-0.1027)

DLog IR (-2) -0.0119

(-0.3197)

-0.0654

(-0.138)

-0.0255

(-2.0984)**

0.2391

(1.3777)

Adj. R-squared 76. 92 60.4 0.46736 0.7011

F-Ratio 17.43 18.4 4.0710 7.7225

Portmanteau coeff. 2 lagged 2 lagged 2 lagged 2 lagged

Current values 0.01196

(0.3103)

0.06539

(0.069)

0.0151

(1.1951)

-0.2726

(-1.5161)

Sources: computed and Summarized by Authors From Autoregressive Analysis , Eview 7. Where; Eq

(1) is the Private Investment Equation; Eq (2) is the Public Expenditure Equation; Eq (3) is the

Economic Growth Equation; Eq (4) Note that the values in parentheses are the t-statistics ; * =

significant at 1%; ** = significant at 5%; *** = significant at 10%.




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The VAR estimates for private investment (PC) reveals the existence of several shocks

that disturbed the trend of private investment in Cameroon. Private investment is significantly

influenced by variables such as credits provided to the private sector, taxes, and foreign aid. It

can be observed from the PC equation above that the one and two year lagged of GC has an

insignificant positive impact on private investment. Hence, current year GC has no significant

impact on the previous values of PC. This is in line with the study of Kollamparambil and

nicolaou (2011) and (kustepeli, 2005).

The model shows a good fit, and its F-ratio justified that the results are more than 95%

reliable. The justification by our finding that government expenditure is positive but

insignificantly influencing private investment within our period of study in Cameroon is a

called for concern. With a portmanteau coefficient of 2, it implies that our result is free from

serial correlation up to two lagged.

From table 1 we observe that government expenditure of previous years adversely affects

current year expenditure. While that of one year lagged is significant, that of two year lagged

is insignificant. Precisely, the result predict that a percentage increase in last year GC [GC(-

1)] or GC for the year before last [GC(-2)] decreases current GC by 0.593% and 0.157 %

respectively. Furthermore, a percentage increase in one year lagged of private investment

result in 2.181 percent increase in public expenditure. This implies that private investment is

effective and efficient in providing revenue for public sector growth. This is in conformity

with the study of Erenburg (1993) and Aschauer (1989).

The coefficient of real GDP shows that one year lagged of real GDP positively influence

current GC in Cameroon. This implies that for GC to increase in the current year, the total

volume of goods and services produce within the country in the previous period should

increase. This is significant at 5 percent. Based on the value of the adjusted R-squared, it

indicated that about 60.4 percent variation in GC is explained by the variables include in the

model. More so, the model is validated by the F-ratio with coefficient 6.1347 that the results

are more than 99% reliable.

The VAR estimates for Economic growth reveals that one and two year lagged of real IR

significantly affects real GDP negatively. Holding all other variables constant, a percentage

change in real GDP is explained by 0.0335 percent decrease in IR of the previous year and

0.0255 percent decrease in the year before last. This denotes the fact that interest rates are too

high which discourages private borrowing in order to carry out investment which will lead to

growth. This finding is similar to those of (kustepeli, 2005). Although the coefficient of

multiple determinations is low indicating that the explanatory variables included in the model




830


have approximately 47 percent ability to predict the behaviour of GDP in Cameroon the facts

remains that high interest has retarded economic growth in Cameroon.

The VAR estimate for real interest rate shows that among all the variables included in the

model real interest (IR) in the previous values has solely impact positively on real GDP. This

implies that a change in IR is being explained by a change in the previous years’ values of

real GDP. Thus a percentage increase in one year lagged GDP leads to an increase in IR by

6.674 percent. The adjusted R-Squared connotes that the variables in the model account for

only 70 percent variation in IR.

Based on the residual correlation analysis results not presented here due to space, GC has

a positive weak correlation (0.086) with PC over our period of study and a weak positive and

negative relationships with GDP and IR (0.1165 and -0.1281) respectively. These results also

show that PC has a weak positive and negative relationships with GDP and IR (0.1414 and-

0.0410) respectively. Hence, it can be deduced from this correlation analysis that there exists

a positive relationship between GC and PC. This implies that they moved in the same

directions. Based on the VAR estimates for public expenditure, it can be observed that private

investment in the previous year has a statistical significant positive impact on public

expenditure. This explains the fact that the various private investments carried out in the

previous year in the country assists the government in financing her expenditures in the

various sectors of the economy. This is in conformity with the study of Erenburg (1993) and

Aschauer (1989).

The macroeconomic results of the VAR estimate of private investment show that public

expenditures impacts positively on private investment over our period of study, but the degree

of crowding in is insignificant. This is as a result of the fact that most of the public

expenditures are not accounted for why others are directed to the unproductive sector of the

economy. This is in accordance with the work of kusteperli (2005). The insignificant positive

impact of public expenditures on private investment can also be justified by the fact that most

government expenditures in Cameroon are political, often directed in unproductive areas in

the economy.

5 Summary Recommendations and Conclusion

This study was designed to investigate into the causality between public expenditure and

private investment in Cameroon and also to test the crowding-in or crowding-out hypotheses

in Cameroon. The correlation result reveals a positive relationship between public

expenditure and private investment in Cameroon. The VAR results also show that public

expenditures insignificantly crowds-in private investment in Cameroon, the implication is that

government activities foster the growth of the private sector but we observed that in




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Cameroon it is insignificant. Therefore, for public investment to sufficiently crowds-in private

investment in Cameroon, efforts needs to be accelerated in the following areas:

decentralisation with the elimination of structural rigidity such as the number of check points

as a way of facilitating the movement of goods and people in Cameroon.

Furthermore, government investment should be concentrated in the areas of

infrastructural development and maintenance, education and research, industrialization and

security at the expense of superfluous expenditure which are political driven with little or no

economic consideration. The interest rate is also observed to be very high and different banks

charged different interest rates in Cameroon, harmonisation of interest rates is needed. Also,

tax concession and tax incentive are recommended to investors depending on the number of

employees of such organisations. Increase in public expenditures in the real sectors is

expected to have an accelerator effect on rising private investment and raising the investment

to GDP ratio of Cameroon. Government and private sections participation in real sectors

development is complementary, thus recommended for effective and efficient development in

Cameroon.

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