Abstract

The study examines the effect of private investment on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on private investment proxy to growth rate of gross capital formation, domestic credit by banking sector and foreign direct investment.

Annual time series data from 1988-2020 was sourced using secondary data and analyzed using Logistic regression estimation technique. It was evidenced that private investment has a significant positive effect on economic growth.

Growth rate of gross capital formation and domestic credit by banking sector have a significant effect on the economy where as foreign direct investments have no significant effect on economic growth of the country. Therefore, the study recommends that investment policy should be more transparent, attractive and competitive.

This leads to a positive impact on investment in terms of volume and diversification. It further recommends that the government should promote exportation of domestic products as a high exchange rate will make our goods more attractive in the foreign market and will increase foreign exchange earnings.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study 

Investment plays a very important and positive role in every economy for the progress and prosperity of any country. Many countries rely on investment to solve their economic problems such as poverty, unemployment etc. The world economy has undergone rapid changes over the past two decades such that the concept of investment now has a fundamental role to play in the development process of any country be it developed or underdeveloped.

Developing countries have responded to the change and challenges of recent decades in different ways which gave rise to varied results. Yet, the rising private sector activities are a common feature of the last twenty years since private sector development promotes efficient economic growth and development through jobs and income creation. In addition to its economic merit, it brings about social and political benefits by engaging people more actively in the production and decision making processes; and tax bases created by private sector development  can be directed towards tackling social and environmental challenges.

Private investment in the informal sector in Cameroon employs above 55% of the labor force. The informal sector providing employment opportunities to the labor force is very significant (World Bank, 2007). This greatly helps in solving one of the major macroeconomic problems- unemployment which hinders economic growth and development.

Economic growth and development depend essentially on a country’s ability to invest and make efficient and productive use of its resources. In this regard, the role of private investment is important both in terms of its contribution to the quantity of GDI and its ability to allocate and employ resources efficiently. Private investment as a proxy for a dynamic private sector has not only been seen as an engine for job and income creation but it also has a role to play in the provision of both infrastructure and social service.

With the liberalization of economies and the acceleration of reforms, private investment increased throughout the world in the 1990’s. The Middle East and North Africa (MENA) countries followed this pattern but at a slower pace. While private investment to GDP grew by 7.3% in the region, this rate reaches 10%in Latin America (LAC), Africa (AFR) and 16% in East Asia (EAP), despite the financial crisis. (World Bank, 1990)

In most economies, domestic private investment has proven to be insufficient in giving the economy the required boost to enable it meet its growth target because of the mismatch between capital requirements and saving capacity. Foreign private investment thus augments domestic resources to enable the country carry out effectively her development programs and raise the standards of living of the people. (IMF, 2010)

The growth of economic and development of countries to some extent depends essentially on a country’s ability to invest and make efficient allocation of resources. Hence, Bayraktar (2003) noted that investment is the result and cause of economic growth. This means that investment in an economy has a great contribution to the nation’s growth rate due to the fact that investment greatly adds to the nation’s total output.

The role of private sector is important in both contributions to quantity of gross domestic investment and its ability to allocate and employ resources efficiently. Private sector investment has been the engine of employment and income creation, provision of infrastructure as well as social services. (Nwakoby & Bernard, 2016). Hence, it plays an essential role in the expansion of the economy’s production capacity and long term economic growth, (Chhibber et al. 1992).

With respect to domestic investment at the level of the national economy, capital spending on new projects in the sectors of public utilities and infrastructure such as branch roads projects and extensions of water and sewerage connections and create urban plans and constructions, housing and extensions of electricity and power generation, as well to projects that relate to economic activity for the production of goods and services in the product and service sectors such as industry, agriculture, housing, health, education, and tourism (Bakari Sayef, 2016).

In most African countries, private investment has an evident input towards the Economic growth of the Nations. Among the levels of economic growth, the debate on the contribution of private investment on economic growth in African countries is a great concern. For instance, the Cameroonian private sector investment is one of the main actors in the Cameroonian economic development and growth. In this line, private investment is any investment that does not involve the government but includes domestic and foreign direct investment.

In recent years the level of private investment in Cameroon is up 26.3% in 2019 compared to same period in 2018. This increase together with gross fixed capital formation contributed 1.2% to GDP growth. Similarly, it contributes 2.2% to GDP growth. As a result, private investment is estimated at CFAF 930.5 billion as against CFAF 133.5 billion of public investment (INS, 2019).

However, in 2018, there was an increase in total investment of 14.4% due the increase in private investment of 8.5%. Thus, private investment drives growth, an increase of 1.7% to GDP growth. This performance is due to the increase in imports of capital goods and transport (INS, 2018).  In 2017 on the other hand will be marked with an increase in private investment of 6.7% and after2.3% in 2016. (INS, 2017).

It’s also noticed that during the period of 1977-1986, Cameroon recorded an average real GDP growth ratio of 7.6%. This was due to a high investment rate of 33% of GDP in 1985, averaging 2.9% in 1977 to 1986. (Touna Mama, 2008)

However, Cameroon has experienced periods of economic crisis corresponding to a law of investment rate rises (Touna mama, 2008). After the implementation of the structural adjustment program, investments are particularly dependent on the productive capital expenditures by the private sector. In Cameroon, exploration of the determinants of private investment shows that the pace of private sector capital accumulations appears to have been determined mainly in the short run by transitory factors, by output, by shocks in the level of demand.

Controlling for other variables, in the analysis points to a displacement effect arising from government investment decisions, competing for resources that could have been used by the private sector. It is worth noting that China’s current economic performance is due to an investment rate of nearly 50%, which is growing at a rate of over 30.5%. This country, for the growth rate of more than 10%, doubles its GDP every Eight (8) years. (Ngouhouo and Mouchilli, 2014)

Moreover, the attitude of investment, the main factor of economic development and growth in all developing countries, has long been the concern of Economists and Policy makers. However, the prevailing relationship between the business environment and the success of firms justifies the challenge that must be taken up by authorities so that by 2035, Cameroon reaches its goal of an emerging country, although the business climate of Cameroon continues to suffer from a heavy and complex institutional a regulatory environment, ranking 166th of 190 countries, according to 2019 Doing Business Ranking (DBR). (Bang et al. 2019).

The trend of private investment in Cameroon, the multiple projects launched by the government and their clear state of progress, shows sufficiently that development by private companies seems to be supported. The productive side is thus inscribed by the predominance of small and small enterprises that symbolize 98.5% of firms and 1.3% and 0.2% of medium and large companies respectively. In addition medium and large enterprises which execute more than 94% of the national turnover of the private sector uses less than 52% of the wealth of the private sector. (Law No 2010/001 of April 13, 2010).

It is all the more easy as the private agents can attribute to themselves the fruits of their effort, implying that the public levies are weak. In addition, the appeal to foreign and national investors has allowed the appearance of modern enterprises in various sectors of the economy such as hydrocarbons, beverages or banking. Nevertheless, the authorities have insisted that as far as possible local interests and the state through the national investment company should be associated.

1.2 Statement of the problem

Given the fact that the private sector investment is generally influenced by varied factors such as in areas like cultural, economic, political, and social factors, research of this nature becomes vast. Also, given the change of the Cameroon economy from the mercantilism view in 1968 to the introduction of the private sector where there is an increase in efficiency of productivity and utilization of state-owned endowments.

The Cameroon government from 1960 to 1984 and lastly in 1990 has put in place some policies called investment codes which are aimed at improving the ability to invest more in the private sector (Lambi, 2009). Also, the industrial free zone legislation of ordinance number 90/001 which became effective on 29th January 1990 had as one of its objectives to encourage and promote private investment in Cameroon (World Bank, 2009).

Today, Cameroons greatest desire is to carryout economic transformation and increase economic growth and development. The country in recent years emphasizes on policies that are geared towards improving investment conditions as embedded in the growth and Employment Strategy Paper. But policy makers need more empirical input and guidance to carryout rational economic decisions since there are few studies on Cameroons economy to provide reasoned insights and guidance to policy. The ultimate aim of drastically reducing the poverty level has sharply increased because of the economic crisis (World Bank, 1995, SameRoon, 1989), cannot be accomplished without rapid economic growth. Therefore in order to achieve sustained economic growth there must be an increase in private investment.

Micro-finance institutions were approved by the government to operate and meet this need and boost investment (World Bank, 2009). Again the structural Adjustment Program (SAP) of the International Monetary Fund (IMF) which came up after the economic crisis in Cameroon in the 1980’s was aimed at boosting investment as one of its objectives (World Bank, 2007)

Despite all these efforts put in place by Cameroon government and the foreign organizations, the level of private investment is still very low. Even with the revision of these investment codes to meet the situation at hand, the private investments are still not up to expectations.

With all this, the contribution of private investment towards the realization of the growth prospect of the country still remains doubtful especially as the tax system most at times tends to deter away private investment as evidenced by the multiplicity of sunrise industries that often close even before they realize full potentials.

Although investment in the private sector is recognized as major determinants of economic growth, there are many controversies as to the way these two are linked. This paper is thus aimed at examining the contribution of private sector investment on the economic growth of Cameroon.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of private sector investment on the Economic Growth of Cameroon?

1.3.2 Specific Research Questions

1. To what extent has the growth rate of gross capital formation influenced economic growth in Cameroon?
2. What is the effect of domestic credit on the private sector on the Economic Growth of Cameroon?
3. What is the effect of Foreign Direct Investment on the Economic Growth of Cameroon?

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