Investment and Growth Dynamics: An Empirical Assessment Applied to Benin

IMF Working Papers, May 1, 2008

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Investigates the nexus of public and private investment and assesses the impact of both types of investment on growth in Benin.
Uses annual data for 1965-2005 and a coherent set of structural VAR outputs to model investment and growth.
Analysis supports the crowding-in effect of public investment.
Finds that institutional and regulatory developments, and private capital formation facilitated by access to financial services, have a significant impact on growth.
Confirms that the slow pace of improvement in Benin's economic freedom index, reflecting relatively weak institutions and slow pace of reform, deters private investment.

Data: annual observations covering 1965-2005.
Econometric approach: structural Vector Autoregression (VAR) outputs and cointegration regressions.
Speed-of-adjustment analysis derived from cointegration regressions to assess deviation of GDP from long-run equilibrium.

Public investment exhibits a crowding-in effect on private investment.
Access to financial services facilitates private capital formation, which significantly impacts growth.
Institutional weaknesses and slow reform (as proxied by the economic freedom index) deter private investment.
Speed-of-adjustment result: 27 percent of the deviation of GDP from its long-run equilibrium is corrected every year.
Implication of speed-of-adjustment: it takes two to three years to cut the gap in half.

Strengthen institutions and accelerate regulatory reforms to improve the economic freedom index and encourage private investment.
Support public investment projects that complement and crowd in private investment.
Improve access to financial services to facilitate private capital formation and enhance growth outcomes.