How should public investment be structured to avoid the crowding-out effect on private investment? Valuable lessons from the Russian economy for Vietnam

Abstract

After each economic crisis, such as the recent COVID-19 pandemic, governments have used public investment as a crucial tool to help economies recover quickly. However, a significant concern is how to structure such investments to meet the intended objectives while avoiding risks during implementation. The crowding-in/out effect of public investment on private investment remains a hotly debated topic. To address this issue, the study utilized data from 63 provinces in Vietnam over the period from 2000 to 2023. Through the use of the Cross-Sectionally Augmented Autoregressive Distributed Lag model (CS-ARDL) model and robustness checks using the Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) models, the research demonstrated that public investment has a crowding-in effect on private investment in the long term. Furthermore, the study identified two main causes of public investment crowding out private investment: first, when public investment exceeds the production capacity of the economy, and second, when public investment is inefficient. This conclusion is drawn from the analysis of the Russian economy. Additionally, the study employed the dynamic panel threshold model and found that if the ratio of public investment to GDP in Vietnam exceeds 8.532%, the crowding-out effect on private investment will occur. Moreover, the research also assessed the effectiveness of public investment in the context of climate change to identify shortcomings that need to be addressed immediately. These findings serve as important bases for proposing measures to improve the efficiency of public investment and avoid the crowding-out effect on private investment.