The Dynamics of Crowding-Out between Public Investment and Private Investment in the Libyan Economy during the Period (1990–2024)

Abstract

This study investigates the dynamic relationship between public and private investment in the Libyan economy over the period 1990–2024, within the context of major political and economic transformations that significantly affected the investment environment and macroeconomic stability. The study employs a dynamic econometric framework using annual time-series data and applies the Augmented Dickey-Fuller (ADF) unit root test, Johansen cointegration test, Vector Autoregression (VAR) model, Granger causality test, Impulse Response Functions (IRF), and Variance Decomposition analysis.

Private investment is considered the dependent variable, while public investment represents the main explanatory variable. The model further incorporates key macroeconomic control variables, including real GDP, inflation (CPI), and domestic credit to the private sector, in addition to a structural dummy variable capturing major structural breaks associated with political instability, institutional fragmentation, and the COVID-19 shock.

The empirical findings reveal that all variables are integrated of order one I(1), with no evidence of long-run cointegration among the variables. VAR estimation results indicate a statistically significant negative effect of public investment on private investment in the short run, supporting the existence of a crowding-out effect in the Libyan economy. In contrast, real GDP and domestic credit exert positive effects on private investment, whereas inflation negatively affects private sector investment activity.

Furthermore, the impulse response analysis demonstrates that private investment responds negatively to shocks in public investment during the initial periods, with the effect gradually dissipating over time. Variance decomposition results also show that macroeconomic variables—particularly public investment and domestic credit—become increasingly important in explaining fluctuations in private investment over the medium and long run.

The study concludes that the relationship between public and private investment in Libya is characterized by short-run crowding-out dynamics and the absence of a stable long-run equilibrium relationship. Accordingly, the study recommends redirecting public investment toward complementary productive sectors, strengthening financial intermediation, and improving institutional and investment conditions to foster sustainable private-sector-led growth.