Macroeconomic Policy and Domestic Private investment: The case of Zambia, 1980-2008
Kaputo, Collins Chileshe
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There has been a lot of emphasis in Zambia on FDI in the last two decades culminating in a steady increase in FDI flows from about US$200 million in 1990 to about US$920 million in 2008. On the other hand, domestic private investment, as a percentage of GDP has generally been low and has shown downward trends for some periods during 1980-2008. It is clear that the government focus on attracting FDI has disadvantaged local investment as shown by the selective application of tax incentives to foreign investors while local investors are denied similar incentives. While FDI has a significant effect on economic growth and has the advantage of transferring technology to local entrepreneurs, it cannot guarantee sustainable economic development in isolation of domestic private investment. Viewed against the background of growing evidence of a link between the growth of domestic enterprises and economic development, an inconsistent and downward trend in Zambia’s domestic private investment should be a matter of concern to policy makers. Thus, this study argues for the increased mobilization of domestic resources and support to domestic entrepreneurs as the sustainability of the country’s economic development and poverty reduction strategies hinge on the growth of local entrepreneurs.Several studies in developing countries emphasize the importance of macroeconomic policy in explaining variations in domestic private investment. They particularly identify fiscal, monetary and financial policy variables that include; real interest rates, output growth, public investment, bank credit to the private sector, inflation and real exchange rate. This study adopts this approach and examines the relationship between macroeconomic policy and domestic private investment in Zambia for the period 1980 to 2008 by means of a regression analysis based on Cointegration and Error Correction Modeling (ECM) techniques. The econometric results provide support for the hypothesis that domestic private investment in Zambia, like other developing countries, is affected by key macroeconomic policy variables. It is clear from the findings of the study that real GDP growth, real exchange rate, real interest rates, inflation, public investment and credit availability to the private sector are some of the key macroeconomic factors that influence domestic private investment decisions in Zambia. The results also indicate that macroeconomic factors affect domestic private investment, both in the short-term and in the long-term. Public investment was found to have a greater impact on domestic private investment in the short-run, while real GDP growth, the inflation rate, bank credit to the private sector, the real exchange rate and the real interest rate had a greater impact in the long-run. Econometric results of the error correction mechanism (ECM) further reveal the existence of a short-run dynamic adjustment process and a long-run equilibrium relationship between these macroeconomic variables and domestic private investment. Any disequilibrium away from the long-run steady state equilibrium of domestic private investment is corrected at the rate of 85.5 percent. In other words, the speed at which domestic private investment adjusts to changes in macroeconomic policy variables of real interest rates, real exchange rate, inflation, public investment, bank credit flows to the private sector and the real GDP growth in an effort to achieve long-run static equilibrium is 85.5 percent. Thus, as results show, policies relating to GDP growth, public investment, bank credit availability, lending interest rates, exchange rate and inflation are expected to significantly influence domestic private investment decisions in Zambia, the magnitude of which depends on the vigor of policy implementation.