This paper investigates the relationship between public investment and private investment to determine whether public investment crowds in or crowds out private investment. In the research, the Structural Vector Autoregressive (SVAR) model will be employed to analyze effects of structured variables in the model. | ECONOMIC DEVELOPMENT No. 205, September 2011 DOES PUBLIC INVESTMENT CROWD IN OR CROWD OUT PRIVATE INVESTMENT IN VIETNAM? by Assoc. Prof., Dr. SÖÛ ÑÌNH THAØNH * Public investment is the primary channel for economic infrastructures. During the economic transition, Vietnam’s government has promulgated fiscal expansion policies by increasing public investment in the hope that public investment might positively influence the economic productivity as a whole and crowd in private investment. Vietnam, in recent years, has tried its best to control and cut back on public investment in an attempt to curb inflation. Thus what is the effect of cutbacks in public investment on private investment? This paper investigates the relationship between public investment and private investment to determine whether public investment crowds in or crowds out private investment. In the research, the Structural Vector Autoregressive (SVAR) model will be employed to analyze effects of structured variables in the model. The research finds that public investment helps crowd in private investment in a long run. Finally, some solutions will be recommended for improving public investment policies of Vietnam in future. Keywords: public investment, private investment, crowding-in, crowding-out effect, FDI, gross investment 1. Theoretical framework There are two economic schools concerning effects of public investment on private one. The neoclassical economics hold the view that expansion of public investment can improve the investment climate and cut back on cost for private investment via an improvement in infrastructure, quality and supply of human resource. When the economy operates below its potential level, raising the aggregate demand via expansion of public investment can crowd in private investment (IMF, 2007). If this theory would be correct, it is probable to assert that public investment facilitates private one. Public investment, however, might also crowd out private investment. The
