Domestic investment and economic growth in Uganda: A time series analysis (1986-2016)

Abstract

The Ugandan economy is a mixed economy where both the public and private sector play a dominant role in terms of development potential. Uganda has implemented an ambitious programme of economic liberalization with reforms targeted at restoring macroeconomic stability and fiscal discipline, while improving the investment climate and growing the economy as witnessed by the various development agenda such as the NDP I &II, the Vision 2040, Presidential Initiatives, BUBU programme among others. These economic reforms have led to improved both local and foreign investor confidence in Uganda.The main objective of this research was to study the effects of domestic investment on economic growth in Uganda using secondary time series data for the period 1986 to 2016 from the World Bank’s database. The researcher used ordinary least squares method to test for the long run relationship. In order to test for the short run relationship and to determine the speed of adjustment between the short-run and long-run equilibrium, the vector error correction model was applied; while the Granger causality test was applied to test for the long-run causal relationship between the variables. The variables that were investigated in this study included economic growth, gross domestic investment, gross human capital formation, foreign direct investments, gross national expenditure, exports and imports of goods and services.The empirical results show that gross domestic investment significantly affects economic growth positively (0.442) and negatively (0.243) at 1 percent level of significance. Contrariwise the ratios of household final consumption expenditure, gross national expenditure, gross human capital formation, exports and imports do not significantly affect economic growth in as much as the exports had a positive relationship with economic growth. Results from the short-run model reveal that the Error Correction Term has a correct negative (-0.255) sign which is significant at 5 percent level of significance, which implies that in each period, economic growth adjusts between the current level and the long run equilibrium level and regressors bring about convergence in the long run. The Granger-causality tests revealed that domestic investment does granger-cause economic growth and economic growth positively Granger-cause domestic investment. Thus, there is a bidirectional relationship running from economic growth to domestic investment. Since Uganda has been pursuing a policy direction of attracting home grown investments under the theme “Buy Uganda Build Uganda (BUBU),the study recommends deliberate efforts to empower the local investors especially encouraging them to acquire technology that would enhance transfer of knowledge from their foreign counterparts.