Macroeconomic, Political, And Institutional Determinants of Private Investment In Ethiopia: A Dynamic Analysis

Abstract This article investigates the macroeconomic, political, and institutional determinants of private investment in Ethiopia based on a time series data from 1985 to 2018. We apply ARDL approach to Co-integration to investigate the long-run and short run outcomes. The result reveals that real GDP has positive significant effect on private investment growth in both long run and short run while public investment has a crowding-out effect in short run but crowding-in effect in the long run. Real interest rate has a significant negative effect on private investment growth in long run unlike its short run effect. Hence, we recommend more effort has to be excreted to increase the market-size and real income of the people to promote private investment. Secondly, public investment in infrastructures is crucial to attract private investors though public investment in sectors that compete directly with the private sector retard private investment growth. Thirdly, given the negative significant effect of real effective exchange rate on private investment, devaluation is not a long-lasting solution to promote private investment unless the marshal-learner condition is satisfied. Fourthly, the government has to ensure consistent management strategies to minimize corruption, violent uprisings, and bureaucratic inefficiencies to build up confidence of private investors.