ALTIN GJINI[1]
University “Aleksander Moisiu” Durres
AGIM KUKELI[2]
University of New York Tirana
JEL Category: E 02, E 13, E 22, G 18
This paper’s principal objective is to analyze the behavior of private investments in market economies in the Western Europe and in the New Emerging Economies (transition economies) in the Easter Europe. The main objective is to investigate the effect of public investment on private investment. Borrowing from neoclassical economics authors expect to see a crowding out effect of public investment on private investments.
The literature is divided and mixed at best at answering the question of what is the role of public investments in private investments. Our preliminary results show that while it can be true that there is a crowding out effect on private investment from public investments in the West this is not the case looking at the East.
There is a vast discussion on the effect of public investment on private investment at the firm level as well as aggregated at the country level. Among other factors recognized for such a discussion like uncertainty, imperfect competition, effectiveness, cost of capital that can bust or hinder private investment under the normal course of the country’s economy this paper looks at another angle. Western countries are diverse in terms of the size of government. The new emerging market economies on the East are struggling to get their economies to compete with western countries who has inherited better public institution, infrastructure, and market conditions overall.
A pool of countries, unbalanced panel data analysis, in old and new European continent is examined over a period of time 1991-2010. The data are obtained from World development Indicators (World Bank data base). Using pooled cross sectional analysis the data confirm the structural break of private investment behavior between west and east. This is due to lack of market economy institutions, infrastructure, overall performance of the economy, and expectations.