Private capital formation and public investment in Sudan: testing the substitutability and complementarity hypotheses in a growth framework

Abstract

Abstract The paper attempts to address the issue of complementarity and substitutability of state capital to private sector investment activities in a neoclassical growth framework. It employs a co‐integrated vector autoregressive model to account for potential endogeneity and nonstationarity problems. Results suggest that both private and public capital spending have stimulated economic growth in Sudan over the period 1970–1998. The impact of private investment on real growth has been more pronounced than that of public sector investment. Public sector investment appears to have deleteriously impacted private sector physical capital expansion, implying that the impact of crowding‐out categories of public sector investment has been large enough to offset any crowding‐in effects. Such crowding out effect has weakened favourable positive effect that public sector's investment has exerted on growth by jeopardising private sector capital undertakings. Copyright © 2003 John Wiley & Sons, Ltd.