Investment and Growth Relationship

Abstract

The study analyzes the relationship between private investment and growth and the key determinants of both investment and growth, with a view to drawing policy lessons from the findings. Academics and policymakers can benefit from stylized facts about how public and private investment can influence growth and help reduce poverty in low-income countries. To the extent that private investment is a determinant of long-run growth, a comprehensive assessment of what stimulates it is essential to identify and address related policy issues. The paper employs econometric techniques to investigate the short- and long-run behaviour of private investment and its links to growth. In line with earlier growth accounting studies, the study establishes that private investment is indeed a critical determinant of growth in Zimbabwe. Moreover, public investment appears to provide long-run support for private investment and growth. The analysis also shows that adverse shocks (e.g., deteriorating terms of trade) can have long-lasting growth effects, while the impact of credit to the private sector has to date been short-lived. There is thus significant potential for institutional reforms to improve the business environment, raise private investment, and invigorate growth.