Abstract

The study examined the effect of public investment on the economic growth of Cameroon. The specific objectives were to evaluate the extent to which growth rate of gross capital formation influence the economic growth of Cameroon, to examine the effect of transport infrastructures on the economic growth of Cameroon an to analyze the effect of energy infrastructure on the economic growth of Cameroon.

This study was backed by Joseph Alois Schumpeter’s Theory of Economic Growth and Harrod-Domar Model of Growth. The model specifies economic growth measured by gross domestic product as dependent on public investment proxy to growth rate of gross capital formation, transport infrastructure and energy infrastructure. Annual time series data from 1990-2022 was sourced using secondary data. A multiple regression model was specified using ordinary least squared estimation technique.

Results show that public investment has a significant positive effect on economic growth. Growth rate of gross capital formation and transport infrastructure have a significant effect on the economy where as energy infrastructure have no significant effect on economic growth of the country.

The study therefore 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 public sector activities are a common feature of the last twenty years since public 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 public sector development  can be directed towards tackling social and environmental challenges.

Public investment in the formal sector in Cameroon employs above 60% 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.

The growth of economic and development of countries is heavily depending essentially on a country’s ability to invest and make efficient allocation of its resources. Hence, Bayraktar (2003) noted that investment is the result and cause of economic growth. The role of the public sector is important in both contributions to quantity of gross domestic investment and its ability to allocate and employ resources efficiently.

Public sector investment has been the engine of employment and income creation, provision of infrastructure as well as social services, Nwakoby and 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).

Respect of domestic investment at the level of the national economy, capital spending on new projects in the sectors of public utilities and infrastructure such as incision main and branch roads projects and extensions of water and sewerage connections and create urban plans and construction projects, housing and extensions of electricity and power generation, as well as social development in the areas of education, health and communication projects, projects as well to projects that relate to economic activity for the production of goods and services in the production and service sectors such as industry, agriculture, housing, health, education and tourism, Bakari (2016). This means that the presence of the public sector can at least spur economic growth and poverty reduction.

With the liberalization of economies and the acceleration of reforms, 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 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 public investment on economic growth in African countries is a great concern. For instance, the Cameroonian public sector investment is one of the main actors in the Cameroonian economic development and growth.

In this line, Public investment is any investment that involves the government but includes domestic and foreign direct investment. In recent years the level of public 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, public investment is estimated at CFAF 133.5 billion (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, public 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 public 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).

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 relationship between investment and economic growth seems rather obvious, since in a market economy, investment is the result of accumulation, a transformation of savings into a fundamental factor of growth. In fact, this status of investment has been recognized since the exogenous growth theory by Solow (1956). It also occupies a prominent place in Schumpeter (1939) analysis of innovation and is still be considered as the most important explanatory factor of the failure of growth in developing countries, particularly in sub-Saharan Africa.

In fact, in these economies, the lack of private savings to fuel private investment was seen as the cause of their lack of growth, and hence of their development lag. This is in part what explained the use of public debt in these countries, to supplement private investment by public investment, and create an economic fabric favorable to growth, and move the economic catch-up as allowed predict Solow’s conclusions. But the explanation also came from the Keynesian theory of insufficient aggregate demand, paving the way for public investment spending to bail out the latter through a multiplier effect and revive economic growth.

Only, if Keynesian stimulus therapy through public spending or investment seemed so elegant, it was not devoid of side effects all that. The risk of crowding out private investment by public investment was so great that the hoped-for spillover effect was in serious danger of being diluted in the crowding out effect. The contribution of public investment to growth would then become insignificant or even negative.

The role of government in economic growth is an issue of debate since the time of Adam Smith. Recent wave of privatization in many developing and developed countries is based on perceptions that, “for sustainable development and efficient output, the role of government in economic policies should be reduced”(Kakar, 2011).

Economists are of two different views about the role of government in economic activities. According to the neoclassical economists, reducing the role of private sector by crowding-out effect is important because it reduces the inflation in the economy; increase in public debt, increases the interest rate which reduces inflation in the economy as well as output.

The new-Keynesians present the multiplier effect in response and argue that the increase in government expenditure will increase demand and thus increase economic growth. The vision of ensuring sustainable economic development and reduction of mass poverty is enshrined, in one way or another, in the government’s development strategy documents of virtually all developing economies. In this respect, economic growth, which is the annual rate of increase in a nation’s real GDP, is taken as main objective for overcoming persistent poverty and offering hope for the possible improvement of society (Kakar, 2011).

In addition, the growth accounting in Solow’s model (1956) shows that the important part of the explanation of growth being attributed to the residual variable, questions arise on the quality of the measurement of traditional variables such as the investment. This squareness of Solow’s model (1956) is the basis of the emergence of theories of endogenous growth, through the work of Barro (1990), Romer (1986) and Lucas (1988), who put forward the importance of endogenous factors in the process of economic growth. Since the latter, in fact, it appears that as a source of productive supply and therefore of economic growth, the impact of public investment on growth is positive and significant, as shown by the work of Barro (1990) and the econometric models of Aschauer (1989).

In practice, according to the World Bank (2017), the distribution of investments in sectors of the economy should be at least 25% of real GDP per year to promote modernization of the economy and sustainable economic growth. The latter being a process of sustainable increase in the volume of production of s wealth’s a national community, poor countries’ economies such as Cameroon and Ivory Coast, need tools allowing adequate dosing investment public. Thus, the analysis of the contribution of investments to economic activity often focuses on the effects of public investment on the one hand, and on the effects of investments on growth on the other deserves serious attention.

In particular, public investments can intensively or extensively develop the production and exchange capacities of the private sector and promote private investment and economic growth. In Cameroon and the Ivory Coast, the decline investment was excessive for years economics crisis that and obsolete public infrastructure are forcing down or slowing the economic growth in these countries (Bandoma et al., 2017; Ehrhart, 2017; Ouattara, 2011). Much work has shown that public investment and growth can interact.

Thus, if increased public spending benefits infrastructures such as roads, bridges. For better infrastructure are likely to increase the marginal productivity of the public sector and create an effect of return of investment with impact positive on economic growth and (Ghazanchyan and  Stotsky, 2013). If on the other hand, public investments are in the manufacturing sector where the state competition the private sector, it is possible that they reduce privates investments. Because in this case, the State acts on the opportunities of the private sector. A substitution effect between private and public investments occurs with mixed results on economic growth (Creel et al, 2015).

In addition, public investment has different magnitude effects on the rate of economic growth (Khan and Reinhart, 1990). The positive effect of public investment on economic growth could come from the necessary infrastructure, such as roads, airports, ports and public buildings, carried out by the state (OFCE, 2016). The objective of this project is to highlight the extent to which public investments affects the economic growth of Cameroon.

This study being based on Cameroon, the issue of government investment should be addressed in a concrete and pragmatic manner in order to conceive an effective spending plan in Cameroon, a point of departure of this study in a country in which the relationship between government spending and growth does not seem to be verified as shown in the data of  MINEPAT (2017) which shows an increase in the public investment budget from 28.28% to  29.57% between 2011 and 2013, with the vice of under-consumption as from the year 2014.

In addition, the financial resources intended for public investment in Cameroon will for the first time exceed 1000 billion CFAF following the launching of the three year plan for the reduction of poverty and the building of sites linked to the organization of the 2016 and 2019 African Nations Cup of football. These resources amounted to 1246 billion CFAF in 2015 (representing 31.2% of the total amount), and 1525 billion CFAF in 2016, i.e. 36% of the total budget (MINEPAT, 2017).

Government investment spending affects economic growth in Cameroon through its long-run effects on education, health, theoretical scientific research and physical infrastructures. This is based on the fact that the public investment budget, besides private investment, is one of the engines of economic growth wealth creation. The resources of the public investment budget are massively dedicated to the financing of major structural projects (roads, hydro-electricity dams, Kribi deep-sea port….) as well as social micro-projects (classrooms, bore-holes and wells, health centers) that improve the living conditions of the population.

In Cameroon, the actions to be carried-out converge towards the resolution of the problems of production, distribution and transportation on the basis of the three Musgravian functions of the State which are: the function of allocation of the resources, the function of distribution (redistribution and transfer of welfare) and the function of stabilization (regulation and economic policy).

The carrying out of these missions is done by means of the State budget which includes the set of government income and expenditure. This new approach is primarily reflected through the increased autonomisation of the public investment budget as an instrument for the achievement of the policies of the authorities.

Despite the fact that public investment spending attained 35% in the total State budget, the target necessary to fuel growth as defined in the GESP is not yet achieved. The IMF recently carried out a detailed study on the importance of government investment. This study shows that after one year, a growth public investment equivalent to 1% of the GDP leads to an increase in GDP of 0.4%. After four years, this impact reaches 1.5% (the IMF, 2014). The share of public investment in the public investment budget of the State of Cameroon witnessed a growth of 124.38% between 2011 and 2016, bringing to 36% the share of public investment in the total government spending 2016.

Public expenditure in Cameroon is usually divided into recurrent and capital expenditure. Suffice it to say that recurrent expenditure are payments for non-repayable transactions within one year while capital expenditure are payments for non-financial assets used in the production process for more than one year.

Over the past decades, the public sector spending has been increasing in geometric terms through government various activities and interactions with its Ministries, Departments and Agencies. In july 2016, public spending stood at 464.10XAF Billionbut saw a drastic increase by july of 2019 to 521.7BXAF Billion (Trading Economies.com/Institut National de la Statistique). In the words of Taiwo and Abayomi (2011), the size and structure of public expenditure will determine the pattern and form of growth in output of the economy.

In Cameroon, the recurrent expenditure of the government include expenses on administration, wages, salaries, interest on loan, maintenance etc, whereas expenses on capital project include roads, airports, education, telecommunication, electricity generation etc. Both capital and recurrent expenditure that constitute the public expenditure recorded a steady increase during the past decade and especially from the year of 2016 to date. The steady increase would be as a result of the political unrest that was witnessed within the aforementioned period.

The effect of public investment on economic growth is still an unresolved issue theoretically as well as empirically. Although the theoretical positions on the subject are quite diverse. Few empirical studies report positive and significant relations between public investment and economic growth while several others find significantly negative or no relation between an increase in public investment and growth in real output (Olapade &Olapade, 2010).

Read more: Economics Project Topics with Materials