Crowding in or Crowding out? Government Expenditure and Private Investment in Ethiopia (1980-2012)

Abstract

This study attempts to investigate crowding in or crowding out effect of government expenditure on private investment in Ethiopia over the period 1980-2012 the central question of this study is weather government expenditure a positive effect  or crowding in effect (complementary hypothesis) or a negative effect  or crowding out effect (the substitutability hypothesis )on private investment in Ethiopia to achieve its objective it adopted a modified flexible accelerator model in this paper multiple regression and cointegration methods were used to analyze the data and the empirical findings support the complementary hypothesis between government capital expenditure and private investment and that tends to crowd-in private investment in Ethiopia and the  recurrent part of government expenditure shows crowding-out effect in private investment The analysis suggests that government should give more priorities to expenditures that compliment private investment rather than spending on expenditures that substitute for private investment.

Keyword: Government expenditure, private investment, crowding-In, crowding out, Ethiopia.