Public sector investment and economic growth in Zimbabwe: A Vector Autoregression (VAR) Approach: 1980-2013

Abstract

This study explored the role of public sector investment in the process of economic growth in Zimbabwe over the period 1980-2013, using the restricted Vector Auto regression (VAR) Approach. Five variables were used in the analysis, with the dependent variable being economic growth, measured by real gross domestic product. Independent variables were public sector investment, private sector investment, labour force and public consumption.The Augmented Dickey-Fuller (ADF) test was employed to test the time series for stationarity while the JohansenMaximum Likelihood Estimation (MLE) method was utilized to test for the existence of cointegration among the variables. Empirical results obtained from the Vector Error Correction Model (VECM) and Wald test coefficient restrictions reveal that public sector investment, private sector investment, labour force and public consumption have positive and significant effects on economic growth in Zimbabwe. Furthermore, findings from the Pairwise Granger causality test disclose the existence of unidirectional causality running from public sector investment to economic growth.The study therefore recommends that the Government of Zimbabwe (GoZ) channels adequate financial resources towards public sector investment in order to exploit its full economic benefits. Moreover, given the limited fiscal space and the current macroeconomic conditions faced by Zimbabwe, it is recommended that the government looks for alternative ways of financing public sector investment in order to fully realize its short term and long term growth effects.