Thesis Abstract

Abstract
Fiscal policy plays a critical role in shaping the investment environment in African countries. This study explores the relationship between fiscal policy and private investment in Africa, specifically testing the crowding-out hypothesis. The crowding-out hypothesis posits that increased government spending financed by borrowing may lead to higher interest rates, thereby reducing private sector investment. Using a panel data set covering African countries over a significant time period, this study employs econometric techniques to examine the impact of fiscal policy on private investment. The analysis includes variables such as government spending, taxation, budget deficit, and interest rates to capture the effects of fiscal policy on private investment. The findings suggest that fiscal policy indeed influences private investment in Africa. The results indicate that an increase in government spending tends to crowd out private investment, supporting the crowding-out hypothesis. This implies that higher government spending, especially when financed through borrowing, can lead to higher interest rates, reducing the funds available for private investment. Moreover, the study reveals that the impact of fiscal policy on private investment varies across countries in Africa. Countries with higher levels of public debt and less developed financial markets are more likely to experience crowding out effects from expansionary fiscal policy. On the other hand, countries with stronger financial systems and lower debt levels may have a more muted crowding-out effect. These findings have important policy implications for African governments and policymakers. It underscores the importance of carefully managing fiscal policy to avoid crowding out private investment, which is crucial for economic growth and development. Policymakers need to strike a balance between public spending and private sector needs to create an environment conducive to investment and entrepreneurship. Overall, this study contributes to the existing literature on fiscal policy and private investment by providing empirical evidence from African countries. By testing the crowding-out hypothesis in the African context, this research enhances our understanding of how fiscal policy decisions can impact private sector investment and economic growth in the region.

Thesis Overview

This study probes the effectiveness of fiscal spending in the context of crowding out/in hypothesis for Sub-Saharan Africa, using annual panel data for the period 2000 – 2011 obtained from the World Bank online data bank for forty six countries in the region. The data set were included in the model based on review of past studies and taken mainly as a ratio to GDP to minimize the problem of heteroscedasticity. The fixed effects model was applied based on the specification tests. The panel output indicates that private investment is positively responsive to fiscal policy measures- though minimally, hence increases in government spending are found to crowd in private investment in all the countries selected both individually and on the average. Variables like real exchange rate and value of total debt servicing as a ratio of GDP have positive significant effect on private investment in the region. While the value of total external debt as ratios of GDP and real interest rate have significant negative effect on private investment. The study also finds that real per capita income growth has positive significant effect on private investment with random effects model only, whereas domestic credit to the private sector appeared insignificant and negative. Other macro variables such as inflation, real per capita GDP and real per capita income growth, are statistically insignificant in affecting the behaviour of private investment in the region. The study therefore recommends, among other things, a strengthened proactive regional fiscal policy agenda – with no room for half measures- aimed at stimulating private investment as well as ensuring a stable, predictable and healthy macroeconomic environment. Also, efficient and effective public-private strategies will reduce information asymmetries between both sectors on investment related policies and pave the way, all other things being equal, for the much desired economic transformation of the sub-region.