Do Public and Private Investment Stand in Each Other's Way?

During the 1980s, the need for reduction of scal deecits lead many LDC governments to cut public investment, impose import restrictions and tighten credit. In this paper we examine the eeect of public policies on private investment in a number of LDCs, to assess whether public investment acted as a catalyst or competed for scarce resources. In order to analyze whether there are diierences among countries in our sample as to the leadership between private and public investment, we suggest a country classiication procedure based on the statistical properties of the series considered. The estimation of a private investment equation on a panel of 33 countries in the period 1970-88 shows evidence of a persistence of investment decisions , of a crowding out of private investment from public investment. Countries with larger real ows of credit, lower real interest rates and small scal deecits have higher levels of private investment. Improvements in terms of trade, availability of imports and low external debt service also contribute to raising investment, while a higher black market premium has the opposite eeect.