Crowding In and Crowding Out Effects of Debt Financed and Tax Financed Public Expenditure on Private Investment in Zimbabwe

Abstract

The study extends literature on the effects of debt and tax financed public expenditure on private investment under the crowding in and crowding out of private investment framework. Over the period 1975 to 2008, the paper presents evidence from Zimbabwe, a developing economy in Sub Saharan Africa. The focus of the study is on the disaggregated public expenditures and how these various components influence private investment. The effects are estimated by linear approximation using Ordinary Least Squares (OLS) regression. In strong agreement with the theoretical framework, results of the investigation show that there are both crowding in and crowding out effects of private investment from increased public spending. The effect however depends on the type of expenditure, regardless of the method of financing. Defense expenditure exhibits consistency in crowding out private investment for both debt and tax financed spending, while public expenditure in other sectors, namely health, education, transport and communications as well as infrastructural development projects had unambiguously positive influences on private investment. The other expenditures component was also found to be significantly crowding in private investment, while the impact of openness of the economy was an insignificant crowding out effect for both model specifications.