An economic analysis of the impact of public investiment policy on private investiment in Tanzania

Investment is very important in any economy. This is because investments play a significant role in economic growth process and poverty reduction initiatives. The level of investment in Tanzania has been very low for very long period of time. One of the reasons behind the low level of investment is that private investment might be crowded out by public investment. The main objective of this study was to investigate empirically how public investment affected private investment in Tanzania during the period 1975 -2005. The study uses cointegration and error collection model in data analysis. Before testing for cointegration and estimation of an error correction model diagnostic test for characteristics of the data was done. All variables were not stationary at level and after first difference all variables except expected output level were found to be stationary. Engel Granger two-stage procedure was used to test for cointegration before estimation •of an error correction model. Ail variables except expected output level variables were found to be cointegrated at first difference which means there was a long run relationship between private investment and independent variables which include interest rate, infrastructural investment and non-infrastructural investment. According to the estimated error correction model infrastructural investment is positively related with private investment and the coefficient of infrastructural investment was found to be significant at ten percent level. Other variable that is positively related with private investment and significant is one year lagged private investment. An important policy implication drawn from this study is that infrastructural investment can play a significant role in the development of private investment.