Private capital formation in the Southern African Development Community (SADC) Countries : a non-reversibility analysis

Abstract

This study examined the contribution of debt and public capital formation in the South African development community (SADC) countries using panel data analysis for the period 1980 to 2015 with the objective of establishing the reversibility or the non-reversibility nature of the private capital formation in these countries using the reversibility analysis within the neoclassical investment model. This analysis starts with finding the appropriate panel regression method applicable, starting with testing the data poolability, fixed and random effects approaches and estimated the neoclassical private capital formation model for the region . The analysis revealed that the data was not poolable, hence the choice between random and fixed effects, of which the Hausman test was conducted and showed that the applicable model was of fixed effect nature. The variables of interest, total debt and debt service ratio as well as the public capital formation were found to have negative and significant effects on private capital formation in the SADC countries. The debt service ratio coefficient shows that countries may experience debt-overhang in the long run and could struggle to service their debt. The study further reveals that growth of gross domestic product and gross national savings tend to increase private capital formation, while interest rate, current account balance, political instability and fiscal balance reduce private capital formation. In an attempt to achieve the main objective of this study, which is to test the reversibility/ non-reversibility of private capital formation model within the neoclassical presentation, with much emphasis placed on the debt and public capital formation variables, the study applied the fixed effect model and found that in the context of the SADC countries private capital formation was not reversible. The results of the non-reversibility analysis also showed that decreases in public capital formation (PUCF_D) contributed positively to private capital formation in the SADC countries, while overall increases appeared insignificant, despite positive influence. The non-reversibility condition was also confirmed with the use of the Wald test (333.89), which assumed that all regression coefficients were identical and equivalent to zero. The test ejected the null hypothesis in this regard and concluded that the coefficients are not identical and equivalent to zero. The findings of this study have implications at both regional and country level with regard to policy making. First, countries will have to prioritise their growth strategies to achieve sustainable private capital formation. Secondly, the debt reduction policies and strategies should be undertaken to attract potential private investors, since is a negative correlation between debt and private capital formation and there exist a long-run relationship between private capital formation and its determinants.