Publicinvestmentandgrowthincaseof Madagascar
Andrianady,JosuéR.andCamara,AlydaE.and Randrianantenaina,KantotianaS.
2023
Onlineat https://mpra.ub.uni-muenchen.de/117422/ MPRAPaperNo.117422,posted29May202313:33UTC
Publicinvestmentandgrowth
ANDRIANADYR.Josué 1,CAMARAE.Alyda2,andRANDRIANANTENAINA S.Kantotiana2
1ServicedesEtudesÉconomique Ministèredel’ÉconomieetdesFinances Antananarivo101,Madagascar jravahiny@gmail.com
2MentionEconomie
UniversitéCatholiquedeMadagascar Antananarivo101,Madagascar camaraalyda1210@gmail.com
3MentionEconomie UniversitéCatholiquedeMadagascar Antananarivo101,Madagascar kantotianarandria@gmail.com
May23,2023
Abstract
Thispaperexplorestheroleofpublicinvestmentintheprocessofeconomicgrowth,inthe contextofMadagascar’seconomy,usingthevectorautoregressiveapproach(VAR).Themodelalso includesmonetarysupplyandexportation.Theresultshowthatpublicinvestmenthaspositiveeffectongrowthinshorttermespeciallyinthesecondquarterbuttheeffectslowlygoesdowninthe nextquarter.Thisisduetotheimpactofinvestmentonmonetarysupplywhichcanleadtopotential riseofprices.Theeffectofinvestmentongrowthreacheshishighestinthefifthquarterafterthatits returntohisstationarystate.
Keywords:Madagascar,VAR,Publicinvestment,money,exportation,GDP.
DISCLAIMER: Theopinionsexpressedbytheauthorsinthisworkaretheirownanddonot representtheviewsoropinionsoftheorganisation.
1Introduction
Madagascarisadevelopingcountrythatfacesnumerouschallengesinachievingsustained economicgrowthanddevelopment.Despitehavingvastnaturalresources,adiverserangeof ecosystems,andarichculturalheritage,Madagascarremainsoneofthepoorestcountriesin theworld.Thecountry’seconomyhasbeenplaguedbypoliticalinstability,weakinfrastructure,andinadequateinvestmentinkeysectorssuchasagriculture,tourism,andmanufacturing.
Publicinvestmenthaslongbeenrecognizedasacrucialdriverofeconomicgrowthindevelopingcountries.Publicinvestmentreferstogovernmentspendingoninfrastructure,social services,andotherpublicgoodsthatareessentialforeconomicdevelopment.Publicinvestmenthasthepotentialtocatalyzeprivatesectorinvestment,createjobs,andimprovetheproductivityoftheeconomy.
InMadagascar,publicinvestmenthasplayedasignificantroleinthecountry’seconomic development.Thegovernmenthasmadesubstantialinvestmentsininfrastructure,includingroads,ports,andairports,whichhaveimprovedthecountry’sconnectivityandfacilitated trade.Thegovernmenthasalsoinvestedinsocialservices,suchashealthandeducation, whicharecrucialforhumandevelopmentandpovertyreduction.
However,theeffectivenessofpublicinvestmentinMadagascarremainsatopicofdebate. Somearguethatpublicinvestmenthasnotyieldedtheexpectedreturns,asevidencedbythe slowpaceofeconomicgrowthinrecentyears.Othersarguethattheproblemliesnotwith publicinvestmentperse,butwiththequalityofinvestment,aswellasissuesrelatedtocorruptionandweakgovernance.
TheCOVID-19pandemichasfurtherhighlightedtheimportanceofpublicinvestmentin drivingeconomicrecovery.Madagascar,likemanyothercountries,hasbeenhithardbythe pandemic,whichhasdisruptedsupplychains,reduceddemand,andledtoadeclineineconomicactivity.Inresponse,thegovernmenthasrampeduppublicinvestmentinkeysectors suchashealth,agriculture,andinfrastructuretosupporttherecoveryeffort.
Therefore,itisessentialtounderstandthelinkbetweenpublicinvestmentandeconomic growthinMadagascar.Thispaperaimstocontributetothisunderstandingbyexaminingthe impactofpublicinvestmentonkeyeconomicindicatorssuchasGDPgrowth,employment, andproductivity.Byanalyzingexistingliteratureandempiricaldata,weaimtoshedlighton therolethatgovernmentinvestmentcanplayinpromotingsustainableeconomicgrowthin Madagascar.Thefindingsofthisstudywillbeusefulforpolicymakersanddevelopmentpractitionersindesigningeffectivepublicinvestmentstrategiestosupporteconomicdevelopment inMadagascar.
2Literaturereview
2.1Theoricalapproach
Numerousauthorshaveinvestigatedtherelationshipbetweenpublicinvestmentsandeconomicgrowth.Accordingto Keynes (1936),publicinvestmentisadeterminingfactorand evenakeyelementinshort-termproductiontrends.Post-Keynesianeconomistsalsoplace publicinvestmentattheheartoftheeconomicgrowthprocess.Theyarguethatinvestment influencesgrowththroughproductiontechniques,thenatureandcompositionofproduction goods,andcapitalgoods Davenport (1976).
Intheviewof Harod (1939),awell-adjustedglobaldemandiscrucialforpublicinvestment tohaveapositiveimpactoneconomicgrowth.However,inthecaseofsignificantfluctuations,publicinvestmentmaydestabilizetheeconomy.Moreover, Cornwall (1974)claimsthat thegreatertheproportionofproductionallocatedtoinvestment,themorethegrowthprocess willdevelop.
2
Theendogenousgrowthmodelby Barro (1991)highlightsthepositiveexternalitiesgeneratedbypublicservicesthroughpublicspendingoninfrastructure.Therefore,infrastructure spendingplaysanessentialroleinthegrowthprocess.However,thecomplementaritybetweenprivateinvestmentandpublicinvestmentisnecessarybecauseitcontributestotheimprovementoftheproductivityofprivatefactors BarroandSalaImartin (1995).
However,otherauthorssuchas Solow (1956)and BurmeisterandDobell (1970)donot sharethesameviewandhavedemonstratedthatpublicinvestmentshavenoplaceinthe analysisofgrowth.
2.2Empiricalapproach
Empiricalstudiesontherelationshipbetweenpublicinvestmentandeconomicgrowthcanbe classifiedintotwodistinctcategories.
2.2.1Publicexpenditurehasaneffectoneconomicgrowth
Inhisresearch,orientedtowardstheimpactofpublicinvestmentontheeconomicgrowthof theUnitedStatesfortheperiod1949to1985, Aschauer (1989 )optedforanaggregateproductionfunctioncomposedofthreefactors:labor(L),capital(K),andthestockofnon-military publicinfrastructure(S).Theresultsoftheanalysisledtheauthortoconcludethattheproductivityofaneconomyisinfluencedbyinvestments,particularlyinpublicinfrastructure.Thus, a1%increaseinpubliccapitalleadstoa0.4%increaseinproductivity.Additionally,theauthor foundthatthedecreaseineconomicgrowthisinfluencedbythedeclineininvestmentspendingininfrastructure.
Barro (1991)studiedthecontributionofpublicinvestments(consistingofeducationand defense)oneconomicgrowth,covering98countriesfrom1980to1985.Thestudyfounda positiveimpact,butstatisticallyinsignificant.Theauthorestimatesthata1%increaseinthe publicinvestment-to-GDPratiostimulatesa0.1%increaseintheaveragegrowthrateofincomepercapita.
Numerousempiricalstudieshaveproposedtheexistenceofapositiverelationshipbetween economicgrowthandinvestmentsinroadinfrastructureindevelopingcountries.
Forexample, CanningandBennathan (1999)devotedtheirstudiestoanalyzingtheimpact ofpavedroadsandelectricityongrowth.Theyusedtwoproductionfunctions,oneofthe Cobb-Douglastypeandtheotherofthetranslogtype.
BasedontheOrdinaryLeastSquaresmethod, Bosedeandal. (2013)deducedthattheimprovementoftransportinfrastructurehasapositiveandsignificantimpactontheeconomyof Nigeriafortheperiod1981to2011.
MorleyandPerdikis (2000)affirmedthelong-termpositiveimpactoftotalpublicspendingonEgyptiangrowth.Analyzingtheimpactofpublicinfrastructureoncompetitiveness andeconomicgrowthinSenegal, DumontandMesples (2000)foundthatanincreaseinpublicspendingoninfrastructurepromoteseconomicgrowthandimprovescommercialperformance.
Veganzones (2001)revealedapositivelinkbetweenpublicinvestmentsininfrastructure andgrowthinasampleof87countriesanddemonstratedthecomplementarityofpublicand privateinvestments.Todothis,hetested25Sub-SaharanAfricancountriesbasedontheTriple LeastSquaresmethod.
Inanempiricalstudyusingtime-seriesdataconductedinUganda, ReinikkaandJackob (2004)alsofoundthateconomicgrowthwassignificantlyjustifiedbypublicexpenditures.
Accordingtoastudyby WorldBank (2005)conductedinSenegalfortheperiod1966-2000, theeffectofpublicinvestmentisdelayedovertimeanditspositiveimpact,estimatedat2.47 points,appearsaftertwoyears.
2.2.2Publicspendingdoesnothaveaneffectoneconomicgrowth
Ontheotherhand,someempiricalstudieshavesuggestedthatpublicspendingdoesnothave asignificanteffectoneconomicgrowth.Forinstance, Dhanasekaran (2001)and MartinezLopez (2005)foundnosignificantevidencetosupporttheideathatpublicinvestmentininfrastructureaffectsthegrowthrateoftheSouthAfricaneconomy.
Similarly, ZahiraandMostefa (2015)investigatedtheimpactofpublicinvestmentininfrastructureoneconomicgrowthinIndiaovertheperiod1951-2010.Thestudyusedavector autoregression(VAR)modelandfoundthatpublicinvestmentininfrastructuredidnothave astatisticallysignificantimpactoneconomicgrowth.
KoffiYovo (2017)alsoinvestigatedtherelationshipbetweenpublicinvestmentandeconomicgrowthinLatinAmericaandtheCaribbeanusingpaneldatafrom1980to2010.The resultsofthestudysuggestthatpublicinvestmentdoesnothaveasignificanteffectoneconomicgrowthintheregion.
Insummary,whilesomeempiricalstudieshavesuggestedapositiverelationshipbetween publicinvestmentandeconomicgrowth,otherstudieshavefoundnosignificantevidenceto supportthisidea.Thefindingsofthesestudieshighlighttheneedformoreresearchinthis areatobetterunderstandtherelationshipbetweenpublicinvestmentandeconomicgrowth.
3Madagascar’sinvestmentpublic
TheMalagasyeconomyisgenerallydisjointed.Economicgrowthhasbeenonarollercoaster pathpunctuatedbycycliccrisesoccurringalmosteveryfiveyears(1991,2002,2009,andrecentlytheCovid-19crisisin2020).
PublicinvestmenthasalsoseenasimilartrendinMadagascar.AccordingtotheWorld Bank,budgetallocationsinMadagascarwereamongthelowestcomparedtoothersub-Saharan Africancountriesin1984.
However,from2006to2008,therewasanupwardtrendinpublicinvestment,surpassing thatofotherAfricancountries.Statespendingincreasedfrom531.5billionAriaryin2006to 1244billionAriaryin2008.Thistrendwasalsoobservedinthecountry’sGrossDomestic Product(GDP).
In2009,therewasasuddenhaltinpublicinvestmentduetoacoupd’étatthatledtoanew crisis.Allexternalfinancing,includingbudgetaryaidandprojectfinancing,wassuspended. Thiswasduetoadisagreementbetweenthegovernmentandinternationaldonors.Asaresult,asignificantamountoffinancingintendedforpublicinvestmentwascanceled.
From2012,publicinvestmentbegantoincreaseexponentially,reachingapeakof3,300billionAriaryin2019.Thiswasaresultofademocratictransitionthatledtogoodconditions fortheeconomytorecover,particularlythroughthereturnofconfidencefromeconomicand financialpartners.Thisrecoverywasreflectedintheupwardtrendininvestmentduringthis period.
Inrecentyears,Madagascarhasbeenworkingtoimproveitsinvestmentclimate,implementingreformsandinitiativestoattractmoreforeigndirectinvestment(FDI)intothecountry. AccordingtotheUnitedNationsConferenceonTradeandDevelopment(UNCTAD),FDIinflowsintoMadagascarreachedarecordhighof464millionUSDin2019,upfrom365million USDin2018.
However,theCOVID-19pandemichashadasignificantimpactonglobalinvestmentflows, andMadagascarhasnotbeenimmunetothis.AccordingtotheInternationalMonetaryFund (IMF),FDIinflowsintoMadagascardeclinedto316millionUSDin2020,adropofaround32% fromthepreviousyear.
Overall,Madagascar’sinvestmentclimatehasseensomeimprovementinrecentyears,but
Figure1:PublicinvestmentandGDPinMadagascar
therearestillchallengesthatneedtobeaddressed,suchascorruption,weakinfrastructure, andalackofskilledlabor.Thegovernmenthastakenstepstoaddresstheseissues,andit remainstobeseenhowtheinvestmentlandscapeinMadagascarwilldevelopinthecoming years.
4Methodology
WeusedquarterlydatafromtheMinistryofEconomyandFinance,particularlyfromtheGeneralDirectorateoftheEconomyandPlanning(DGEP),aswellasdatafromtheNationalInstituteofStatistics(INSTAT).Thestudyperiodspansfromthefirstquarterof2009tothelast quartersof2020.
4.1BasicModelandVariablesUsed
Inordertoestablishtherelationshipbetweenpublicinvestmentandeconomicgrowth,the followingvariableswerechosen:realGDP,publicinvestment,exports,andmoneysupply. Thus,theequationofourmodelcanbewrittenasfollows:
GDPt = f (PubInv, Exp, M3)
where:
•GDP:RealGrossDomesticProductorproxyforeconomicgrowth
•PubInv:Publicinvestment
•Exp:Exports
•M3:Moneysupply(M3)
ExportswereincludedbecauseMadagascarisacountrythatismoreoutward-oriented. Thus,theintegrationofthisvariableisnecessaryinthecontextofthisanalysis.Moneysupply wastakenintoaccountinthesensethatpublicinvestmentleadstoamassiveinjectionof moneythatwillundoubtedlyleadtoanincreaseinthemoneysupply,whichcouldresultina generalizedpriceincrease.
4.2ModelDetermination
InordertostudytherelationshipbetweenpublicinvestmentandGDPinMadagascar,itis necessarytodeterminethemodeltobeusedinordertoconducttheanalysisproperly.This processisdonethroughastationaritytestoneachvariableandacointegrationtestonthe entireseries.Iftheresultsshowthatthevariablesareintegratedofthesameorderandthat thereisacointegrationrelationshipbetweenthem,weusetheVectorErrorCorrectionModel (VECM).However,weusetheVectorAutoregressiveModel(VAR)ifthesevariablesareintegratedofthesameorder,butthereisnocointegrationrelationshipbetweenthem.Finally, weusetheAutoregressiveDistributedLagModel(ARDL)ifthevariablesareallintegratedat differentorders.
Inthiswork,thestationaritytests(Philip-PerronandAugmentedDickey-Fuller)andcointegrationtestshowedthatthevariablesGDP,publicinvestment,moneysupply,andexports areallstationaryatthefirstdifference.Therefore,wededucethatwewillusetheVectorAutoregressiveModel(VAR)tostudytherelationshipbetweenpublicinvestmentandeconomic growthinMadagascar
5ResultsandDiscussions
Thevariablesareexpressedinlogarithmandthendifferencedtohavedataingrowthrates. Theresultofthelagselection(AICandSBICtest)displaysanoptimallagequalto3.
TheimpulseresponsefunctionorIRF(figure2)showstheeffectsofastandardshockof endogenousvariablesonGDP.Inthecaseofpublicinvestment,theresponseoftheeconomy variesovertime.Indeed,itsimpactonGDPispositiveduringthesecondperiod,namely thesecondquarter,whichreflectsagoodperformanceoftherecoveryplan.However,itis worthnotingthatthetrendshowsadeclineinthethirdperiod.Thissituationisrelativeto thebacklashfromtheincreaseinthemoneysupplygeneratedbythemassiveinjectionof moneyfromtheinvestment,whichcouldleadtoageneralizedpriceincreaseslowingdown theeconomybutalsohaveeffectsonexports.Thiswouldthenrequiretheinterventionofthe CentralBankintheregulationoftheeconomytocushiontheshockofinflationoninvestment. Inthelongerterm,theeffectsreachtheirmaximuminthefifthperiod,orthefifthquarter,to graduallyfadeawayandreturntothestationarystate.
Figure2:ResultoftheIRF
6Conclusion
Therelationshipbetweenpublicinvestmentandeconomicgrowthhasbeenextensivelystudiedbyvariouseconomistssuchas Keynes (1936)and Barro (1991).Thesescholarsattestthat publicinvestmenthasapositiveinfluenceontheeconomy.However,someempiricalstudies haveconcludedinsomecasesanegativecorrelationbetweenthesetwoaggregates.
Inthisstudy,theVARapproachwasusedtomodelthisrelationshipforthecaseofMadagascar.Theresultsshowthatintheshortterm,publicinvestmenthasapositiveeffecton economicgrowth.Theeffectsofpublicinvestmentaremainlyseeninthelongterm,afterfive quarters.However,theseeffectsfluctuateinanundulatorymanner,asanincreaseinpublic investmenthasconsequencesonotheraggregates.Therefore,publicinvestmentisagoodtool forstimulatingeconomicgrowthinMadagascar,butitmustbeaccompaniedbysoundmonetarypolicytolimititseffects.
Inconclusion,thisstudyprovidesevidencethatpublicinvestmentcanhaveapositive impactoneconomicgrowthinMadagascar,butpolicymakersneedtocarefullyconsiderits effectsandensurethatitisaccompaniedbyeffectivemonetarypolicies.Futureresearchcan explorethedynamicrelationshipbetweenpublicinvestmentandothereconomicvariablesin Madagascartobetterinformpolicydecisions.
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