A TIME SERIES ANALYSIS OF PRIVATE AND PUBLIC INVESTMENT IN IRAQ’S ECONOMIC GROWTH PROCESS (1970 – 2010)

Abstract: Since the 1980s, there has been growing recognition among developing countries that an essential foundation for sustainable growth is capital investment, both public and private. While Iraq is an oil-rich country, with substantial oil revenue, only a small proportion of it has been allocated to importing the capital that is most needed, while the rest has mainly been used for consumption purposes. The effects of the oil-driven state development, conflicts, sanctions, high unemployment and delayed reforms have significantly shaped Iraq’s economy and limited the potential for private-sector-led growth over the past 40 years. This conclusion is worrying for a country like Iraq, which has shown some downward trends in private and public investment, both in the total amounts and relative to GDP. This study, the first of its kind, empirically assesses the pattern of domestic private investment in Iraq and its key determinants over the past four decades. It also examines the issue of the complementarity (crowd-in effect) or substitutability (crowd-out effect) between public capital and private investment in the trend in economic growth. Finally, it evaluates the determinants of public investment, to reveal the indirect impacts oil revenue has on private investment through the increasing of public investment. The thesis employs time-series data and annual datasets covering 1970-2010. Both the ADF and the PP unit root tests are employed to test for the stationarity of the data. Johansen’s cointegration is used to establish the long-run equilibrium relationship among the variables in the models. The VECM is also utilized to examine the short-run dynamics between the variables. The main empirical results support the accelerator principle hypothesis of a positive relationship between GDP and private investment. The McKinnon-Shaw hypothesis is, however, not verified in the case of Iraq but there is some evidence that private investment is crowded in by public investment, and that oil revenue has an indirect effect on private investment.Kurdistan Regional Governmen