Public sector deficits and private investment: a test of the crowding-out hypothesis in Pakistan's manufacturing industry

Abstract

The purpose of this analysis is to assess whether public sector crowding out of investment in manufacturing has been a mjor factor affecting the pattern of private capital formation in that sector. The results of modified Granger Causality test suggest that expanded public investment in infrastructure has not played an important role in stimulating private investment in industry. If anything, it appears that private investment has stimulated a follow-on expansion in infrastructure. On the other hand, financial crowding-out of private investment in large-scale manufacturing is a distinct possibility; but it may not be a simple, straight-forward process. Private investment in large-scale manufacturing may have suffered from real crowding-out associated with the government's non-infrastructural investment programme. Finally, it should be noted that neither financial nor real crowding-out seems to occur in other areas of private investment.