Bank of Uganda Working Paper Series Working Paper No. 01/2016 Private and Public Investments and Economic Growth in Uganda: A Multiplier Model Analysis Thomas Bwire ¶1 , Wilson Asiimweظ, Grace, A. Tinyinondi ¶2 , Priscilla Kisakyeظ, and Denise, M. Ayume ¶1 ظMinistry of Finance, Planning and Economic Development ¶1 Research Department, Bank of Uganda ¶2 Statistics Department, Bank of Uganda July 2016 Working papers describe on-going research by the author(s) and are published to elicit comments and to further debate. The views expressed in the working paper series are those of the author(s) and do not in any way represent the official position of the Bank of Uganda. This paper should not therefore be reported as representing the views of the Bank of Uganda or its management
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Bank of Uganda
Working Paper Series
Working Paper No. 01/2016
Private and Public Investments and Economic Growth in
Uganda: A Multiplier Model Analysis
Thomas Bwire¶1, Wilson Asiimweظ, Grace, A. Tinyinondi¶2, Priscilla Kisakyeظ, and Denise,
M. Ayume¶1
Ministry of Finance, Planning and Economic Developmentظ ¶1Research Department, Bank of Uganda ¶2Statistics Department, Bank of Uganda
July 2016
Working papers describe on-going research by the author(s) and are published to elicit comments and to further debate. The views expressed in the working paper series are those of the author(s) and do not in any way represent the official position of the Bank of Uganda. This paper should not therefore be reported as representing the views of the Bank of Uganda or its management
Bank of Uganda WP No. 01/2016
\
Private and Public Investments and Economic Growth in Uganda
A Multiplier Model Analysis
Prepared by
Thomas Bwire¶1, Wilson Asiimweظ, Grace, A. Tinyinondi¶2, Priscilla Kisakyeظ, and Denise, M. Ayume¶1
Ministry of Finance, Planning and Economic Developmentظ ¶1Research Department, Bank of Uganda ¶2Statistics Department, Bank of Uganda
July 2016
Abstract
This paper applies a multiplier model on Uganda’s 2009/10 Social Accounting Matrix
(SAM) to investigate the impact on growth of private and public investments. A positive
impact of general investment on growth is found, but with varying degree of sectoral
intensity. Infrastructural investments depict the highest income multiplier effect on
growth than the general industry and services sectors, while excess capacity exist in the
agricultural sector and the labor market and returns to capital from each unit of
investment more than double the returns to labor.
Capital is increasingly driving growth, but at the expense of the agriculture sector and
labor market. It appears necessary that capital utilization needs to be complemented with
strategies to utilize the excess capacity in agriculture and the labor market, if growth is to
be all inclusive. One way to address the labor market challenge is to use policy to steer
the productive system towards adopting capital-led labor intensive technologies
simultaneously with increasing government infrastructural investment.
JEL Classification: C02, C22, C67, E22, H30, J20
KEYWORDS: Public investment; Private sector investment, GDP, Cointegration, Multiplier model,
Social Accounting Matrix and Economic growth
To cite this article,
Bwire, T., Asiimw, W., Tinyinondi, A. G., Kisakye, P. and Ayume, M.D. (2016), “Private and Public
Investments and Economic Growth in Uganda: A Multiplier Model Analysis”, Bank of Uganda
Notes: “---”denotes dependent variable, and p-values in parentheses
Source: Author’s Computations. Estimates from E-Views
Collectively, the null hypothesis that the system variables considered here do not influence growth in
the short-term is rejected at the conventional 5 percent level of significance; so that in general, this set
of variables, over the short-term are growth enhancing. Individually, public development expenditure
has a more pronounced growth enhancing effect in the short-term than does private sector investment.
The result on government development expenditure though consistent with the multiplier model
results, is somewhat surprising because development expenditure is expected to be associated with a
lagged/delayed impact on output growth. In this case however, it reflects in part the multiplier effect
it has on aggregate demand which, over the short-term, may distort or stimulate economy-wide
output. The level of national output does not seem to drive, in the short run, development expenditure
and private sector activity.
5.0 Conclusion and Policy Implications
The paper investigated the impact on growth due to private and public investments in Uganda using a
suite of multiplier model based on the 2009/10 Social Accounting Matrix (SAM) and the vector error
correction (VECM) and Granger non-causality frameworks for the period Q3-1997 to Q3-2015.
Based on the multiplier model, government investment in public goods and infrastructure generate
more economic growth than does private investments in public goods like education, health and
others, implying that government investment is shouldering substantial growth out turns compared to
private investment. This general result is robust to VECM and Granger non-causality evidences
where a steady-state long-run relationship between economic growth, public and private sector
investment, and exports and imports of goods and services is found, and a strong unidirectional
causality running from both public and private investments to growth is uncovered, with public
investment having a more pronounced growth enhancing effect.
Disaggregating the sectoral effect, the paper uncovers excess capacity in both the agricultural sector
and the use of labor and that the current economic growth is shouldered by industry and service
sectors. We find that the industry sector is mainly driven by government infrastructure investments
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and that it possesses the highest growth multiplicative income effect. This suggests that to maximize
economic growth, investments should concentrate in industrial sector. However, the two key growth
driving sectors in general and the industry sector in particular, have weak backward linkages with
agriculture sector, except for ‘agro-processing’ and ‘hotels and restaurants’.
The excess capacity in the agricultural sector implies that investment in industry is a necessary but
not sufficient condition. The sufficient condition would require utilizing the excess capacity in
agriculture to boost growth. This requires scaling up investments in the agricultural production as
well as improving on the inter-linkages between agriculture and industrial sector through promotion
of agro-processing. The impact on growth is maximized when investments are directed to agricultural
sub-sectors that provide raw materials to the agro-processing industries. In addition, policies to
expedite the inter-linkages between agricultural sector and the rest of the industrial sector need to
focus on investing more in agro-processing with special concentration in food-agro-processing. The
results also carry the implication that the capacity of the industry sector to revive agricultural growth
strongly relies in the agro-processing sub-sector that demand raw materials from the agricultural sub-
sector of interest.
The study also finds that factor income response to each unit of investment is skewed more towards
capital returns than wage returns, and the returns to labor from investment is comparatively weaker in
agriculture sector compared to the service sector. Capital driving growth at the expense of agriculture
and labor efforts is good news, but this may hurt inclusive growth agenda particularly because of the
economic importance of agriculture. Therefore, in addition to promoting agro-processing,
infrastructural development and agro-steered agriculture, the economy needs to also devise a policy to
utilize the excess capacity in labor market. Since less leakages exist in the labor market, a holistic
approach could be followed where a capital-driven labor-intensive technologies are adopted in the
development process as investments in agro-processing is scaled up. For instance in infrastructure
development, as capital is employed, it could be combined with more labor to boost both productivity
and employment of labor as well as increase the capacity of the income multiplicative system to
generate or steer more economic growth.
Overall, accelerating growth will require three simultaneous approaches. First, promoting
industrialization and in particular agro-processing and ensuring a non-declining government
infrastructure investments at least in the short- to the medium-term. This is because government
investments have strongest multiplier effect for each unit of investment and is strongly linked to
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industrial and service sectors. Agro-processing has strong linkages with the agriculture sector which
employs more than 66 percent of Uganda’s workforce. The second approach is to strengthen the inter-
linkages within the economic system. Currently the inter-linkages in the economy are low especially
between agricultural sector and the rest of the economy. Still a large share of the economy’s
intermediate inputs are imported and input-output relationships in the economy are still strong
between industry and service but weak with agricultural sector with exception of the agro-processing
industry. The third policy approach is to endeavor to rejuvenate the productivity in agriculture by
promoting agro-based demand-driven agriculture output. Revamping agriculture will require a
holistic approach including strengthening its linkages to other sectors as well as focusing on import
substitution of imported raw agricultural materials.
Finally, the paper also finds that a substantial portion of investment in Uganda is sourced from the
rest of the world, thus increasing a potential risk for leakages from the economic system and this is
constraining the multiplicative process. The impact on economic growth, of the leakage-injection of
foreign capital on the multiplicative income should be judged based on the net effect of these
investments against the cost of repatriation. A suitable candidate for extension of this analysis could
be to establish the net-effect of foreign capital and repatriation on economic growth.
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