ABSTRACT

Despite the presence of numerous studies on the role of private investment in Africa and the world at large, the presence of studies showing how private investment affects economic growth in Cameroon is limited. Coming at a time when the nation is aiming to achieve “vision 2035”, the role of this study cannot be overemphasized.

As a result, this study is focused on “the dynamics of private investment on economic growth in Cameroon”. The study has as objectives; to analyze the impact of domestic private investment on economic growth, and to investigate the effect of foreign direct investment on economic growth in Cameroon, with control variables; government spending and private health spending. A VECM analysis is used to establish the relationship between both concepts. Time series data was collected between periods of 1980 to 2021, and was analyzed using STATA. A series of econometric test were carried out to properly establish the relationship that exists between variables in the study. From the results it indicates that; DPI and FDI have a negative relationship with economic growth in Cameroon in both the short run and in the long run.

The result also indicated that, government spending has a negative relationship with economic growth in Cameroon in the short run, while in the long term government spending has a positive relationship with economic growth, and private health spending has a positive relationship with economic growth in both the short and in the long run. This therefore implies that dynamics in private investment have an impact on the growth of GDP in Cameroon.

The study therefore recommends that; the right way to go in order to achieve economic growth is to revisit the components of private investment in Cameroon from both domestic and foreign investors in order to ensure a positive impact of private investment on economic growth. Government spending also has a significant role to play as it greatly affects economic growth; hence the study recommends an increase in government spending that ensures a more profitable and sustainable private sector investment in order to encourage economic growth. The study also recommends an increase in private health spending in order to increase productivity of labor in the private sector.

Keywords: Domestic private investment, Economic growth, foreign direct investment, government spending, private health spending, private investment.

CHAPTER ONE

INTRODUCTION

• Background of the Study

Achieving economic growth is the main objective for most economies. This is even more vital because achieving economic growth enables an economy to also achieve a reduction in unemployment and poverty. From empirical study, investment has been identified as one of the major ways through which a less developed country can turn into a developed country. Therefore it is safe to say countries that have undergone a given level investment processes in the past are countries that have been able to achieve a given level of economic growth. Bayraktar (2003) asserts that a country’s ability to grow is related to that country’s ability to invest, and also that more investment comes from a country’s ability to grow. Sail (2010) also asserts that countries that have been able to grow economically are countries that are able to invest a greater portion of their GDP, while countries that grow slowly are countries that have a limited range of investment. Wherein, we have both private investment and government investment. Private investment plays a leading role in the economy because it greatly enhances the performance of the economy. Mathews et al (2020), assert that, private investment has the possibility for stimulating the growth of a country in ways that public investment cannot, because when funds are channeled through the private sector, it enables a country to achieve its objectives in better ways. A limited level of private investment has the possibility of reducing the level of economic growth in a country.

Empirical study has also highlighted the importance of government investment in an economy’s desire to achieve economic growth, but economists have also emphasized the importance of private investment in the growth process of an economy. Private investment is the profit driven part of investment in an economy where both domestic and foreign investors carry out investment projects for potential rewards. International organizations have also accredited private investment as a means to achieving a proper functioning economy, for instance European Union (EU) (2014) asserts that, private investment has the potential to generate inclusive and sustainable growth for most developing countries. The international finance corporation (2011) also indicates that, private investment has the possibility of driving the growth process of a developing country. Private investment through their contribution on aspects like; employment, poverty reduction, environmental protection, tax generation, has the possibility of aiding the growth process of these developing countries. Therefore countries that have been unable to properly establish the importance of private investment have experienced a limited level of growth in GDP, which is further reflected in the high rates of unemployment in these countries, accompanied by general economic decay. UNICEF statistics (2018), reported that Spain had the highest rate of unemployment in Western Europe, which stood at 17.4 percent. The reason for this was the inability for the private sector to properly contribute to the growth in Spain, and also the existence of a mismatch between private investments and the growth process in Spain.

Investments create room for increase in employment opportunities in an economy, increase in income, and increase in demand and sustained increased in economic growth for a country. Ajaz et al (2012) assert that the expansion of output and hence GDP of a country is dependent upon an economy’s ability to invest in capital assets. Levine (2005) also supported this view, as he asserts that investment in capital asset is the major way through which an economy can achieve an increase in GDP, and hence an increase in sustained economic growth. This is because investment in physical capital can stimulate performance of a country directly or indirectly (Ajaz et al 2012). America and China are considered as two of the largest economies of the world in terms of the contributions made to world output; over the years these two economies have understood the importance of investment, private sector investment inclusive in achieving economic growth and have been able to build a reputation as two of the world’s powerhouses when it comes to investment. According to IMF statistics (2019), the rate of private investment in America has doubled by four times within the period of 1960 to 2018; this explains the high level of economic growth experienced in America over the years, which translates to high levels of employment and lower poverty rates. Similarly, China has experienced a rapid increase in the level of private investment over same period, which eventually went ahead of public investment in 2006. The sudden increase in private investment in China was experienced from 1992, when China implemented policies that encouraged foreigners to invest and as such led to an increase in foreign investment.

In 2013, Africa was classified as one of the poorest continents, basically because of low levels of investment by almost all African nations and also high levels of European dependence. But the World Bank expected most African countries to at least attain middle income by at least 2025 (World Bank 2017), bearing in mind the role of investment, most especially private investment. But this has been a farfetched reality as most African countries are just two years away from the due date and still living in abject poverty. Ayangwe and Eliza (2017) stipulated that, European colonization have continually put Africa in a depressed position, but based on modern study it is seen that, Africa continue to remain impoverished because of the inability of the African man to push himself in a position to invest in private opportunities and also create an atmosphere for foreign investment from other countries.

According to IMF statistics (2004), Senegal experienced a fluctuation in their level of domestic growth from independence right up to the early 2000s, owing to the fluctuations experienced in the level of private investment in the country. From independence right up to 1972, Senegal’s economy experienced an estimated 2.3 percent increase in growth, which increased to about 4.5 percent by 1977. However during the early 1980s, the Senegalese economy just like many African economies experienced the economic depression. This period exposed the financial and economic inefficiencies of the Senegalese government, which eventually led to a fall in growth rate to about 1.7 percent. From this period it became evident that, a state dependent economy was no longer enough to prosper the Senegalese economy. From there on, the Senegalese government introduced policies to combat low levels of economic growth and improves the employment situation, through domestic and foreign trade liberalization. Which was evident in the growth rate of Senegal between the period of 1985 and 1988, which increased by 4.4 percent. From here on it became evident that, encouraging private investment was the best way through which economic growth could be achieved in Senegal.

And from here on, the implementation of the SAP program to enhance the level of private investment, began to bare fruits. The SAP program was basically intended to create a favorable environment for private sector operators in Senegal. These measures consist of; reducing interest rate which was a big hindrance to private investment in Senegal, taking away the effects of state monopoly on private investment and also encouraging foreign investment and flow of income from foreign countries. From here on, Senegal experienced a rise in private investment per GDP which rose to above 20 percent by early 2000. This rise was also accompanied by an increase in government revenue to above 20percent and a slight improvement in unemployment rates and poverty reduction in Senegal as reported by the national institute for statistics of Senegal (2005).

From independence Cameroon was predominantly a state driven economy, with major investment projects in the county being carried out by the government. At the point in time, the inefficiencies of the state were majorly covered by the rich natural endowment of the country. Cameroon at that time was considered as the leading contenders to achieve a faster rate of economic growth among African countries because of its ever present natural richness. Tambi (2015) pointed out that, the presence of oil reserves and favorable agricultural condition, implied that Cameroon still have of the best endowed primary sector in Sub – Saharan Africa. It was until the global crisis experienced in the 1980s, that the importance of the private sector was properly introduced in Cameroon. That is after the crisis exposed the inefficiency of the public sector in driving the Cameroon economy towards achieving economic growth. The economic depression of the 1980s opened up the possibility for private investment in Cameroon from both domestic as well as foreign sources. Over the years the growth of privately owned businesses has increased in Cameroon, albeit the fact these businesses are mostly small scale businesses. The growth of these small scale businesses have also been supported in Cameroon as they also contribute massively to the country’s economic growth. The head of state during the Investment Cameroon program of May 2016, earmarked small scale businesses as a means of achieving the emergent Cameroon by 2035 (Vision 2035). This growth in small scale businesses have been so massive over the years, as such in 2019, the minister for small and medium sized enterprises announced that, more than 14000 small scale business were created in Cameroon. This goes a long way to improve on the level of economic growth of the country.

From the 1980s, the possibility for private investment in Cameroon began to gain more traction from both domestic and foreign investors, and also had a significant impact on the growth of GDP in Cameroon as the years went by. INS statistics (2018) report that, the level of private investment in Cameroon during that year, was at 8.5 percent and also contributed about 1.7 percent to GDP in this year. This therefore indicates that, there is a relationship between private investment and economic growth in Cameroon (represented by changes in GDP), but seeing as the level of economic growth in Cameroon is still at a very low level, it is evident that how vest private investment can affect economic growth is not well established by empirical study in Cameroon, hence the reason for this study.

• Statement of the Problem.

It has generally been accepted by many economist and different economic stake holders that, the main macroeconomic objective for a developing country like Cameroon is to achieve economic growth and potential economic development. And it is generally viewed that in order to achieve this objective, Cameroon has to carry out the necessary investment projects needed to push the economy to the desired level of economic growth and potential economic development. The bone of contention here is, the level of investment is still very minimal, especially when it comes to private sector investment in Cameroon. Most developing countries Cameroon inclusive have over the years relied on the public sector as a means of increasing the production of goods and services in the economy. But it is quite evident that, this sector has failed to achieve this, this leaves developing economies with one way out, private investment. But despite this realization, the level of private investment over the years has still remained very minimal in Cameroon.

The economic crisis of the mid 1980s exposed the incompetency of the Cameroon government in single handedly driving the growth process of the Cameroon economy. Before the 1980s Cameroon was majorly a state oriented economy, where most investments were being carried by the government. The economy was majorly dependent on agriculture and its natural resource endowment. But the mid 1980 crisis accompanied by general economic mismanagement and an overvalued currency reduced the prosperity rate of the country. This necessitated the involvement of the private sector. From here on the Cameroon government sought for ways to encourage private investment from both domestic private investors as well as foreign investors. Initially the government looked at self-sustaining measures to get out of the crisis, through reduction of salaries to civil servants and reduction of cost in state administration, but as time went on, the state recognized that private investment was the way forward. The state initially started with privatization of state owned enterprises in order to raise revenue. Key to note is that this brought private investors into the economy. Subsequently the state opted for support from the IMF and friendly countries in what ultimately became known as the SAP program. These programs opened up the Cameroon economy more to the international sector, than what had been experienced during the; pre-colonial, colonial and post-colonial periods. As these programs encouraged international trade between countries. All these were meant to encourage the level of private investment in Cameroon, in order to achieve a more prosperous and growing economy. All these led to improvements in private investment in Cameroon and also affected economic growth. By 2013, as reported by the INS for Cameroon, a new investment law was passed that was meant to encourage private investment, most especially small scheme holders. And at the investment Cameroon of May 2016, the head of state earmarked small scheme holders as a potential flag bearer in the desire to achieve vision 2035.

Recently the level of private investment in Cameroon has experienced slight increases as the government has sought for ways in which she can encourage both private domestic investment and foreign direct investment, by putting in place an investment climate that will favor the activities of private investors. Ngouhouo and Mouhili (2014) stipulated private investment and economic growth in Cameroon, move in similar directions, and as such increasing private investment in Cameroon also implies increasing the level economic growth in Cameroon. And by putting measures in place to encourage private investment in Cameroon, the economy experienced the following string of rates in private investment. By 2016, private investment in Cameroon increased by 2.3%, and contributed about 0.5% to the GDP (INS, 2016). By 2017 the level of private investment increased by 6.7%, compared to the increase experienced in 2016, and also had 1.4% contribution to the GDP (INS 2017). In 2018, private investment increased by 8.5% and contributed to a 1.7% increase in the GDP of the country (INS 2018). And by 2019, the level of private investment was at 26%, as against the same period in 2018, which was evidently greater than the level of public investment (INS 2019). These statistics indicate that, despite the numerous efforts put in place by the government to encourage private investment, in order to beef up economic growth, the level of private investment is still very minimal and also its impact on economic growth is also very limited.

Over the years, empirical studies have been presented to analyze the relationship that exist between private investment and economic growth in Cameroon, ranging from studies that examine the effect of private investment on economic growth in Cameroon (Dabal 2021), to studies that examine the impact of saving on investment and economic growth (Ngouhouo 2014), to studies on private investment and endogenous growth (Ghura 1997). Given the fact these studies have failed to provide a definite answer as to the trend to follow in achieving economic growth in Cameroon relative to investment, necessitates the need for a study to enhance previous knowledge on the relationship between private investment and economic growth.

The slow rate of economic growth in Cameroon has duly been attributed to the stakeholder’s inability to understand the casual relationship that exists between private investment and economic growth in Cameroon. Stake holders have failed to properly define the best kind of private investment that can encourage economic growth in Cameroon, and also stake holders have failed to clearly establish factors that enhance private sector investment in order to enhance economic growth in Cameroon. The stakeholder’s have mainly focused on policy without actually knowing how private investment can enhance economic growth.  Hence the need for this study intended to properly show how private investment affects economic growth in Cameroon.

1.3 Research Question

1.3.1 Main Research Question

What are the dynamics of private investment on economic growth (GDP) in Cameroon?

1.3.2 Specific Research Questions

• What is the effect of domestic private investment on economic growth in Cameroon?

• Does foreign direct investment affect economic growth in Cameroon?

1.4 Research Objective

1.4.1 Main Research Objective

To examine the dynamics of private investment on economic growth in Cameroon.

1.4.2 Specific Research Objective

• To analyze the effect of domestic private investment on economic growth in Cameroon.
• To investigate the effect of foreign direct investment on economic growth in Cameroon. 

1.5 Research Hypotheses

The investigation will be conducted with the help of the following set of hypothesis which are presented in the null form;

• Ho1: Domestic private investment has no significant effect on the level of economic growth in Cameroon.
• Ho2: Foreign direct investment has no significant effect on the level of economic growth in Cameroon.