Capital Formation and Economic Growth in Mauritius

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225pub public gross domestic capital formation (% GDP) CSO, Mauritiusedu gross secondary school enrollment (%) CSO, Mauritiusroadroad density, km of road per 100 sq. km of landareaCSO, Mauritiusm2 broad money (% GDP) World Development Indicators(2012)tradesum of goods and services exports and imports(%GDP)World Development Indicators(2012)tradeserv sum of services exports and imports (% GDP)World Development Indicators(2012)tradegds sum of goods exports and imports (% GDP) World Development Indicators(2012)tax corporate tax as a share of total direct income tax MRA, various annual reportsNote: The data set covers the period 1976-2010, except for road and fdi1 which is available as from 1980.Preliminary AnalysisThis part presents some observations based on table 2 and the data plots at Annex 1. It isremarkable to note that for the past four decades or so, Mauritius has constantly witnessedimprovements in real income per-capita, in fact it has more than trebled from around Rs.60,000/year in 1976 to Rs. 190,000/year in 2010. Over the same period domestic capitalformation has hovered around the average of 30% of GDP, where private and public sectors hadan average share of 20% and 10%, respectively. The contribution of the private sector todomestic capital formation is two-fold higher than the public sector. This also confirms that since1976, or perhaps earlier, Mauritius has undoubtedly benefitted the status of a mixed economy12

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225a comfortable level of financial services compared to other small islands in the Indian Oceanregion, with a notable offshore banking sector. In fact, the island embarked on financial andeconomic liberalization in the early 1980s aligning to Structural Adjustment Programme underthe IMF.Table 2: summary statistics (without log)Variable Obs Mean Std. Dev. Min Maxrgdpc 35 112137.9 42399.59 58610.77 193067priv 35 19.93 3.26 13.42 26.07pub 35 9.27 2.18 5.28 14.28gdfcf 35 29.20 4.071 20.96 36.42fdi 35 1.15 1.45 -0.610 5.80fdi1 31 8.91 5.765 2.21 23.74trade 35 117.89 12.70 93 137tradegds 35 83.54 10.66 63 103tradeserv 35 34.34 8.25 18 48m2 35 65.74 20.81 39 103road 31 93.02 5.08 87.01 101.96edu 35 53.74 10.06 38 69tax 35 51.64 8.98 33.75 68.54absorb 35 67.08 14.68 40.64 89.70Next, tables 3 and 4 compare the gross fixed capital formation and FDI (net-inflows) for aselective sample of countries and group of countries, i.e. Mauritius and Singapore (countries),14

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225and small states and middle income countries (group of countries). Benchmarking Mauritiusagainst average small states and middle income countries makes sense, since it belongs to thetwo categories. Similarly, comparison with Singapore is also justified. Notably, both countriesentered the post-colonial era with a high level of poverty and their post-independence growthstory since mirrors each other. For Singapore the transformation was from a fishing village to abustling economy. And for Mauritius it was from sugar-based to a five-pillar economy.Table 3: gross fixed capital formation (% GDP)Selective sample 1980 1990 2000 2010Mauritius 27 36 28 29Singapore 39 31 30 24Small states 25 24 23 24Middle income Countries 24 23 23 27Source: World Development Indicators (2012)Table 4: fdi net-inflows (% GDP)GrowthSelective sample 1980 1990 2000 2010(%)Mauritius 0.10 1.55 5.80 4.43 4430Singapore 10.42 15.45 17.19 18.13 74Small states 2.32 2.23 4.29 5.13 221Middle income Countries 0.56 0.73 2.57 2.60 464Source: World Development Indicators (2012)In terms of fixed capital formation, Mauritius expended more than small states and middleincome countries, on average. Mauritius and Singapore have achieved more or less similar levels15

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225of capital formation as a percentage of GDP, however, Singapore showing 6% decline for thelast decade.Regarding foreign capital, for the past four decades FDI (as % GDP) in Mauritius experiencedremarkable progress with growth rate of more than 4000%. To lesser extents, small states andmiddle income countries have witnessed generally upward trends, with average growth in FDIfaring at 221% and 464%, respectively. Although, Mauritius outperforms Singapore in terms ofFDI growth, the situation is reversed when comparing the size of FDI itself. For instance, theshare of FDI for Mauritius was 100 times lower than Singapore in 1980 (0.10 compared to10.42). Interestingly, this gap has been significantly reduced in 2010, i.e. to only 4 times (4.43compared to 18.13). While the performance of Mauritius is commendable on this count, there isyet room for progress and considerable FDI promotion to match Singapore‟s achievements.As preliminary results to the empirical model proposed earlier, partial relationships betweenforeign or private or public capital formation and real income per capita are given in figure 1, forMauritius covering the period 1976-2010. A positive influence on economic growth can beobserved for both FDI and private investment as demarcated the line of best fit. Conversely, forpublic investment an inverse relationship can be observed. Thus, we may infer that private andforeign capital formations are more desirable for growth, compared to public capital formation.While this posits public capital formation as detrimental to growth, it is beyond the scope of thepresent study to assess whether public capital offers more social than economic returns, andexternality effects that public capital goods such as road, schools, hospital, etc., may have oneconomic growth.16

1111.51212.5111111.511.5121212.512.5Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Figure 1: impact of capital formation on growthrgdpc and privrgdpc and pub2.6 2.8 3 3.2 3.4priv1.6 1.8 2 2.2 2.4 2.6pubrgdpc and fdi-3 -2 -1 0 1 2FDIUnit root testAlthough aggregate time series tend to be I(0) or I(1), studies such as Harris (2003) and Johansen(1995) have contended the existence of I(2) stationary variables. In cases where variables are I(2)stationary, long-run regression tend to be spurious. Also, the ARDL bounds tests procedure isinvalid when variables are I(2). 8 Therefore, it is crucial to examine the stationarity status of allvariables included in the model, to ensure that they are not I(2) or beyond. To assess the order ofintegration of the variables the standard the Augmented Dickey-Fuller (ADF) and the Phillips-8 According to Ouattara (2004) the computed F-statistics provided by Pesaran et al. (2001) are not valid for I(2)variables. This is because the lower or upper bounds are assumed to be I(0) or I(1).17

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Perron (PP) tests are used. 9Table 5, presents the results and justifies the order of integration ofeach variables identified. 10Table 5: Unit root test for variables (in log form)level formdifference formVariablesADF Phillips-Perron ADF Phillips-PerronDecisionZ(t)P-P-P-P-Z(t)Z(t)Z(t)ValueValueValueValuergdpc (c, t) -2.736 0.2215 -2.302 0.4330 -3.480 0.0416 -5.123 0.0001 I(1)priv -2.183 0.0188 -1.958 0.3051 -3.076 0.0024 -4.361 0.0003 I(1)pub -1.558 0.0652 -4.577 0.0002 -4.237 0.0001 -14.683 0.0000 I(0)gdfcf -1.787 0.0420 -2.224 0.1978 -3.351 0.0011 -7.523 0.0000 I(1)fdi (c, t) -3.106 0.1049 -3.453 0.0447 -5.361 0.0000 -6.874 0.0000 I(0)fdi 1(c, t) -1.337 0.8785 -0.951 0.9504 -2.731 0.2235 -4.337 0.0028 I(1)trade -2.069 0.0236 -2.004 0.2850 -4.424 0.0000 -5.255 0.0000 I(1)tradegds -1.931 0.0315 -1.846 0.3581 -4.420 0.0001 -5.242 0.0000 I(1)tradeserv (c. t) -3.148 0.0952 -4.202 0.0045 -4.477 0.0016 -6.922 0.0000 I(0)edu (c, t) -3.558 0.0336 -2.333 0.4159 -2.722 0.2270 -6.906 0.0000 I(1)road (c, t) -2.726 0.2255 -2.549 0.3039 -3.447 0.0454 -5.570 0.0000 I(1)m2 (c, t) -2.575 0.2914 -2.902 0.1615 -2.981 0.1374 -4.696 0.0007 I(1)tax -2.942 0.1489 -3.599 0.0299 -5.0009 0.0002 -8.067 0.0000 I(0)absorb (c. t) -2.977 0.1386 -3.321 0.0802 -4.363 0.0025 -8.403 0.0000 I(1)Note:(c, t) is used to denote „constant with trend‟, otherwise „constant, no trend‟.9 These tests have been developed from seminal studies by Dickey and Fuller (1979) and Phillips and Perron (1988).10 It is important to note that in cases where the results of the ADF and Phillips-Perron tests are different, thePhillips-Perron results are retained since it is powerful in rejecting the null hypothesis.18

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Consistent with theory, FDI and public investment are I(0) since they represent the firstdifferenceof foreign and public capital stock, respectively. Regarding private investment theADF test confirms stationary status while the PP test confirms for I(1). In addition, strong timetrend is detected for variable edu, road, and m2. Therefore, based on the unit root test presentedabove it is confirmed that all selected variables are I(d), where 0 ≤ d ≤ 1, i.e. decision columnshows status for each variable. Thus, warranting adoption of the ARDL procedure, whichrequires all variables included in a model to be either I(0) or I(1).Correlation matrixA correlation matrix is constructed to detect co-movements and nature of relationships betweenvariables, as per table 6. Both private investment and FDI are positively associated with realincome per capita, while the reverse is true for public investment. Similarly, positive relationshipis found between FDI and private investment, and negative association exists between FDI andpublic investment. Regarding, control variables very strong correlation is established betweenedu, m2, road, and tradeserv. Thus, problems of multi-collinearity may arise if these variablesare concurrently included in the model. To verify the severity of collinearity among the variablesthe variance inflation factor technique is explored.19

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Table 6: Correlation matrix of variables16

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Variance inflation factor (vif)First, we regress a general model and then apply VIF technique to detect collinearity amongpredictor variables reported below. 11 The test is used to detect variables having a tolerance valuelower than 0.1, comparable to a vif of 10. The results confirm low tolerance value for edu, m2,road, and tradeserv, implying that these variables cannot be simultaneously included aspredictors. It can therefore be argued that these variables may capture/measure the same thingsince they, more or less, follow identical time paths.Table 7: variance inflation factor (general model)Variable VIF 1/VIFRoad 52.41 0.019080Edu 49.01 0.020404m2 33.26 0.030063Tradeserv 19.02 0.052581Priv 4.47 0.223525Tradegds 3.61 0.276680Fdi 2.32 0.430727Pub 2.07 0.483870Mean VIF 20.77Due to the problem of multicollinearity encountered the following remedial actions are taken.First, the total trade is selected instead of tradeserv and tradegds. Second, a composite index isconstructed to represent variable edu, road, and m2. The index is described as absorb, which isshall capture the domestic capacity to absorb as identified in the literature section. Since all the11 The general model is given by: rgdpc f priv,pub,fdi,edu,m2,road,tradegds,tradeserv17

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225variables concerned are reported in percentages, they can be appropriately represented asgeometric mean, or log average.absorbqi 1Z i1qorabsorbexp1qqi 1lnZ iNote, the above is more reliable than simple average when dealing with percentage formvariables. Moreover, compared to weighted average it eliminates any biasedness that maypotentially arise while assigning relative weights to variables. The reduced model is specified as:gdpc t = β 0 + β 1 fdi t + β 2 pub t + β 3 priv t + β 4 trade t + β 5 absorb + e t . Table 8 confirmssignificant tolerance value for all the variables.Table 8: Variance inflation factor (reduced model)Variable VIF 1/VIFPriv 3.16 0.316660Trade 3.08 0.324910Fdi 2.34 0.427064Absorb 2.30 0.433894Pub 1.75 0.571878Mean VIF 2.532.6 Results and DiscussionThis section comprises of two parts. The first part explores both short- and long-run impact offoreign, private and public capital formation on economic growth, while controlling for tradeopenness and absorption capacity. The latter part investigates short- and long-run acceleratoreffects on measures of capital formation. In addition, the dynamics between measures of capitalformation are assessed to test whether crowding-out hypotheses hold.18

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225(i) Impact of capital formation on growthIn the ARDL bounds testing approach, the first step is to specify the short-run effects in ECMformat so as to establish existence of long-run relationship among variables. Thus, equation [5]is transformed into [6] as:rgdpcqgii 1tfdit0i1rgdpcqzii 1zt 1t it2privt 13pubt 14fdit 1z5 t 1pq fkrgdpct1k 1 i 1iprivtiq pi 1i[6]pubtiIn the above ARDL-ECM equation represents the drift parameter, andjare the long- andshort-run multipliers, andare white noise error terms. The equation is similar to those of Engleand Granger (1987), except that it comprises a linear combination of the lagged level variables inplace of the lagged error-correction term. Following Pesaran et al. (2001), cointegration can beexpected if the long-run coefficients of all lagged level variables are jointly significant (i.e.values of, for i = 1,..,4). The ARDL-ECM equation is estimated and the F-test is carriedout to test the null hypothesis of no cointegration. 12H 0: λ 1 = λ 2 =λ 3 = λ 4 = λ 5 = 0H 1 : λ 1 ≠ λ 2 ≠ λ 3 ≠ λ 4 ≠ λ 5 ≠ 0Note, the F-test follows an asymptotic non-standard distribution and the critical F-values areobtained from Pesaran et al. (2001). The test generates two asymptotic critical valuesrepresenting the lower and the upper bounds. The two asymptotic critical bounds provide a testfor cointegration when the independent variables are I(d), if and only if 0 ≤ d ≤ 1. Table 2.9compares the computed F-statistics of the model with the bounds, the findings confirms that thecomputed F-statistics is greater than the upper bound critical value at 1% significance level, the12 According to Pesaran et al. (1997), OLS coefficients of first differences are of no direct interest to the boundscointegration test.19

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225null hypothesis of no cointegration is, therefore, rejected. 13 In a nutshell the results confirmsstable long run cointegration relationship between economic growth and measures of capitalformation.Table 9: bounds test resultsDependent variable F-statistics 1% Critical F-valuesLower boundUpper boundrgdpc 14.2070 3.15 4.43Note: Critical Values are cited from Pesaran et al. (2001), Table CI (iii), Case 111: Unrestrictedintercept and no trend.The second step is about estimation of long- and short-run impacts. The long-run impacts can becaptured in the theoretical ARDL (p, q f , q p , q g , q z ) model written as follows:rgdpcqci 0t4iztbipk 1tkrgdpctkqfi 01iprivtiqpi 02ipubtiqgi 03i[7]fditiIn line with Bahmani-Oskooee and Ardalani (2006), out of the long-run coefficients a laggederror correction term, denoted by ECM t-1 , is generated to replace linear combination of laggedvariables, and re-estimate the models at the optimum lags. The short-run dynamic parameters areobtained by estimating an error correction model associated with long-run estimates, as perequation [8]. Where coefficientsj represent short-run effects and coefficient of ECM t-1 , i.e., gives the speed of adjustment or convergence to long-run equilibrium. Based on Banerjee et13 The lower bound assumes that all the regressors are I(0), and the upper bound assumes I(1). If the computed F-statistics lies above the upper bound, the null is rejected, indicating cointegration. If the computed F-statistics liesbelow the lower bound, the null cannot be rejected, supporting the absence of cointegration. If the statistics fallwithin the bounds, inference is inconclusive.20

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225al. (1993, p. 233), ifis negative and significant variables show convergence to their long-runequilibrium.rgdpctprgdpcqt i i t i i t i i t ik 1 i 1 i 1 i 1 i 1qf p g zprivpubqfdiqiztiECMt 1ut[8]Table 10 shows the results for the empirical ARDL(1,0,0,1,1,0) model. 14 The model generatesone-period lag of real income per capita, FDI, and absorption capacity as additional variables.The coefficient of lagged of the error correction mechanism, ecm(–1), is significant at -0.11367,which imply a statistically significant adjustment coefficient. This also suggests that around onetenthof the discrepancy between the long-run equilibrium value and the current value of the realincome per capita is corrected within one year. Several diagnostic test, including Breusch-Godfrey serial correlation LM test, ARCH test, Jacque-Bera normality test and Ramsey RESETspecification test, are used to verify the robustness of the model. More importantly, the modelhas the correct functional form, which ensures validity and reliability of results.14 The optimal lag lengths in the ARDL model are chosen by values that minimise the Schwarz Bayesian Criterion(SBC)21

Short-runLong-runCapital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Table 10: long-run coefficients and short-run ECMRegressorrgdpcCoefficientT-ratioPriv 0.15012 0.94133Pub -0.25668 -0.72730Fdi 0.17078 ** 2.4770Absorb 1.2843 *** 5.1386Trade 0.33426 0.60830constant 5.4709 *** 3.3459∆priv 0.017064 0.92773∆pub -0.029177 -0.92076∆fdi 0.0099382 * 2.0030∆absorb -0.46798 *** -4.3811∆trade 0.037996 0.71579constant 0.62187 * 1.8280ecm t-1 -0.11367 ** -2.4024Model Summary:ARDL(1,0,0,1,1,0)R-Squared = 0.99825F( 8, 24) = 1715 *** Diagnostic tests:Serial correlation:Functional form :F(1, 23) =F(1, 23) =0.709862.1572 *Note: * 10%, ** 5%, and *** 1%Results indicate positive impact of private investment and FDI, and a negative impact of publicinvestment, on economic growth. The long-run elasticity of real income per capita with respect22

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225to FDI is 0.17, which is higher than the coefficient for private investment at 0.15. In addition,while impact of FDI is statistically significant for both short- and long-run, significance is notestablished in the case of private investment. For public investment, although statisticallyinsignificant, results confirm retarding effects on average real income for both short- and longrun.Thus, in accordance to Devarajan, Swaroop, and Zou (1996) the effect of public fixedcapital formation on per-capita growth is negative.More important and significant impact rest with the absorb index which capture effects ofimprovements in road infrastructure, amassment of human capital, and financial development. Itcan be generally be argued that long-run per-capita growth is critically elastic to changes incapacity to absorb, whereby a percentage point improvement in the index contributes to 1.28percent increase in long-run per-capita growth. For trade openness a positive but insignificant isreported, lending to the argument that while freer trade may be beneficial it is not a criticalfactor, also given that the level of openness has always been high for Mauritius. Thus,contending that trade openness is a factor that can be assumed to be very high across small islandeconomies. However, according to Read (2010) heavy reliance upon international trade canmagnify even small trade shocks into a large impact, resulting in high growth volatility.In a nutshell, compared to domestic capital formation, FDI appears to be an important driver ofthe per-capita growth. The growth performance experienced by Mauritius can be attributed todomestic capacity to absorb, which altogether combines road infrastructure, financialdevelopment, and human capital prove.(ii) Accelerator effects and crowding-out hypothesesIn general, accelerator effect refers to the positive impact of economic growth on changes incapital stock. Implying an accelerator model represented as:23

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225KcYWhere ∆K measures total capital formation, ∆Y represents change in real income per capita, andc is a given scalar showing the capital output ratio. In the present study, in addition to economicgrowth, the above model is modified to capture impacts of other measures of capital formationand control variables. In this connection, the ARDL procedure is applied to three models. Thefirst model posits FDI as dependent variable, while models 2 and 3 place private and publicinvestment, respectively, as dependent variables. At the first stage, the bounds test is conductedfor each model and results are reported below.Table 11: Bounds test resultsModel F-statistic 1% Critical F-valuesLower boundUpper boundModel 1: fdi 1 f ( rgdpc,pub,priv,z)1.3470Model 2: priv f ( rgdpc,pub,fdi1,z)1.44553.15 4.43Model 3: pub f ( rgdpc,priv,fdi1,z)5.9448 3.41 4.68Critical Values are cited from Pesaran et al. (2001), Table CI (iii), Case 111: Unrestricted interceptand no trendFrom the results, the computed F-statistic is below the lower critical bound for model 1 and 2.Hence, long-run cointegration relationships cannot be established in the two cases. FollowingKremers et al. (1992), we shall rely on the significance of coefficient for the error correctionterm as a useful and efficient way of establishing cointegration. Conversely, for model 3long-runcointegration is very well established. The long- and short-run coefficients are reported below:24

Short-runLong-runCapital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Table 12: long-run coefficients and short-run ECMRegressor Model 1 Model 2 Model 3Coefficient T-ratio Coefficient T-ratio Coefficient T-ratiorgdpc 1.0136 1.2680 0.61055 ** 2.3727 0.46745 0.86034pub -1.9893 * -1.7966 -0.2045 -1.2232 n.a n.apriv 0.74005 0.41965 n.a n.a -0.26300 -0.52364fdi1 n.a n.a -0.30512 ** -2.6144 -0.40839 * -1.6613trade 4.4586 * 1.7181 1.3084 *** 2.7564 1.7590 ** 2.3042tax -0.23056 -0.12620 0.3241 1.3521 n.a n.aconstant -30.2303 *** -3.3149 -10.5958 *** -3.1225 -10.0815 -1.4307∆rgdpc 0.64508 1.1723 0.28823 ** 2.2295 0.30077 0.89450∆priv 0.47101 0.41780 n.a n.a -0.16922 -0.54780∆pub -1.2661 * -1.9770 -0.096421 -1.3140 -0.40644 ** -2.5735∆fdi1 n.a n.a -0.14404 ** -2.5868 -0.26277 * -1.7340∆trade 2.8376 * 1.7812 0.6179 *** 3.4628 1.1318 ** 2.5433∆tax -0.14674 -0.12687 0.15220 1.2280 n.a n.aconstant -19.2400 *** -2.5971 -5.0021 *** -3.3287 -6.4868 -1.5700ecm t-1 -0.63645 *** -3.6854 -0.47208 *** -4.0341 -0.64344 *** -2.8674ModelsummaryARDL (1,0,0,0,0,0)R 2 = 0.66074F(6, 27) = 8.7641 *** ARDL (1,0,0,0,0,0)R 2 = .83304F(6, 27) = 22.4521 *** ARDL (2,0,0,0,0)R 2 = 0.48725F(6, 27) = 4.1179 ***Diagnostic Serial correlation: Serial correlation: Serial correlation:25

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225tests F(1, 26) = 0.82833Functional Form:F(1, 26) = 0.0054376F(1, 26) = 0.010141Functional Form:F(1, 26) = 1.1261F(1, 26) = .081478Functional Form:F(1, 26) = 6.3159 **Note: * 10%, ** 5%, *** 1% and n.a not applicableLong-run positive accelerator effects are established for all three measures of capital formation,whereby a percentage increase in real average income contributes to the respective increase inFDI, private and public investment by 1.0136, 0.61055 and 0.46745 percents. And, short-runaccelerator effects stand at 0.64508, 0.28823, and 0.30077, respectively. However, significantaccelerator effects are only established for private capital formation, whereas for foreign andpublic capital formation the accelerator effects are weak both in size and significance.Analysing the impact of FDI on domestic fixed capital formation, vice-versa. First, crowding-outeffects are reported from FDI to private capital formation, where short- and long-run impactsstand at -0.14404 and -0.30512, respectively. From private investment to FDI, although evidenceof crowding-in is detected, the results are statistically weak or insignificant. Second, two-waycrowding-out is established between public investment and FDI. From FDI to public investmentthe elasticity coefficient is significantly negative at around -0.41 for both short- and long-run.And, the impact of public investment on FDI is significantly negative and more important -1.2661 (short-run) and -1.9893 (long-run).The nexus between domestic private and public capital formation for Mauritius conforms to thecrowding-out hypothesis. The results yield a two-way crowding out between the two variables ofaround -0.2, however, the coefficients are not statistically significant. Thus, weak crowding-outis established between private and public capital formation, vice-versa.26

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Impact of trade openness is significant and positive on overall capital formation. In particular,the impact of openness is highest on FDI. For instance, the long-run coefficient is 4.4586 for FDIcompared to 1.3084 and 1.7590 for private and public investment. This certainly imply that tradeopenness considerably improves FDI attractiveness. Finally, a negative but insignificant impactof tax is detected on FDI. In addition, the coefficient is small at -0.23056 proving that FDI is taxinelastic,which is in line with the tax literature.After estimating the different models, we investigate the stability of the long- and short-runrelationships for each model. To infer about stability of parameters Brown et al. (1975) proposedthe cumulative sum (cusum) and cumulative sum of squares (cusumsq) tests. The cusum (andcusumsq) compares the cumulative sum of residuals (and squares of the residuals) over timewithin a set of confidence intervals, and if the sum of residuals moves outside the intervals at aparticular point the model is said to be unstable. 15 The main advantage with the test is that it usesthe cumulative sum of recursive residuals based on the first n observations, which is updatedrecursively and plotted against break point. The figures reported at Annex 2 gives theCUSUMSQ plots for each model. The results confirm that parameters of each model are robustand do not suffer from structural instability. 162.7 ConclusionIn contrast to the weak influence of private investment, we retained the significant impact offoreign investment on long-run economic growth, thus, confirming the prospects that FDI holdsfor Mauritius. And, highlight the long-way to be paved to reach the Singapore‟s model, whereFDI is around 20% of GDP compared to 5% for Mauritius. Also, though insignificant, the15 For example, if the plot of the CUSUM and CUSUMSQ stays within the 5 per cent critical bound the nullhypothesis that all coefficients are stable cannot be rejected. If however, either of the parallel lines are crossed thenthe null hypothesis (of parameter stability) is rejected at the 5 per cent significance level.16 Note, for the cusum and cusumsq plots at annex 3, the results can be interpreted as marginally significant since theplot lies, more or less, on the 5% bounds.27

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225negative impact of public investment on growth remains cause for concerns. While this implythat public investment has been unproductive, here the results can be cautiously justified if, firstwe assume public investment flowing into public capital stock such as road, schools, hospital,etc., which does not directly generate economic returns, but instead long-run spillovers throughimproved road networks, education, health. And second, it can be argued that the link betweenpublic capital spending and public capital stock, often, if not, always rest on the sector‟s degreeof efficiency, waste, and corruption, which may impinge on the execution and effectiveness ofpublic projects.Accelerator effect from economic growth to capital formation is established only in the case ofprivate investment. Thus, confirming that for Mauritius economic growth is critical for domesticprivate capital formation, where high economic growth may serve as a signal to indigenousbusiness decisions. In the case of foreign investment the accelerator effect is not supported andthis result is supported by Blomstoerm, Lipsey and Zejan (1994) and Dritsaki et al. (2004), whorevealed found a unidirectional relationship between FDI and economic growth, with directionfrom FDI to growth. Similarly, for public capital formation the accelerator hypothesis is rejected.In particular, we showed significant crowding-out from foreign to private capital formation. Thismay imply that domestic firms may struggle to compete with powerful foreign firms as per Ramand Zhang (2002). In other words, local firms may be weak in responding competitively toforeign firms. Regarding foreign and public capital formation, a two-way crowding-out isrevealed. The trade-off relationship between public investment and FDI can be interpreted in twoways. Firstly, if the level of public capital formation reflects on the size of government or theextent of government intervention/regulation or implying higher tax burden, then high publicinvestment may directly or indirectly discourage FDI. Secondly, if FDI represents a means for28

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225privatization or outsourcing, then increasing FDI provides the opportunity for government toprivatise or outsource some of its operation. This has been the case in Mauritius with the partialprivatization of the Mauritius Telecom in partnership with France Telecom in 2001. Finally,weak crowding-out is detected between public and private capital formation.Notably, the importance of conditional factors such as financial development; human capital; androad infrastructure is clearly established under the proposed absorptive capacity index. Giventhat Mauritius enjoys a good track record on all three fronts, the domestic absorption capacityhas also quite high, i.e. over 50% in 1976. In addition, although Mauritius has been importantlydependent on trade, openness does not exert significant influence of growth. However, theimpact of openness on FDI and private investment is well established both in the short- and longrun.Thus, on one hand, implying that openness to trade is important in determining theproductivity of both foreign and private capital formation. And, on other hand, trade shocks maysignificantly affect foreign and private capital formation in Mauritius, thus rendering domesticgrowth highly volatile. Finally, although the impact of tax burden on foreign capital formation isnegative, it is not significant for Mauritius.ReferencesAcemoglu D., Johnson S. and Robinson J. (2001). The Colonial Origins of ComparativeDevelopment: An Empirical Investigation. American Economic Review, 91, 1369 – 1401.Agosin, M. R. and Mayer R. (2000). Foreign Investment in Developing Countries: Does itCrowd in Domestic Investment?‟ UNCTAD Discussion Paper, No.146, Geneva: UNCTAD.Aitken B. J., Gordon H. H. and Harrison A. E. (1997), „Spillovers, Foreign Investment, andExport Behavior,‟ Journal of International Economics, 43,103-132.29

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Aitken, B. and Harrison A. (1999). Do Domestic Firms Benefit from Direct Foreign Investment?Evidence from Venezuela. American Economic Review, 89, 605-18.Alfaro C. (2004). Argentina: ICSID arbitration and BITs challenged by the ArgentineGovernment. Alfaro – Abogados.Alfaro L., Chanda A., Sayek S. and Kalemli-Ozam S. (2002). FDI and Economic Growth: TheRole of Local Financial Markets. ECON WPA, No 112007, University of Houston.Aschauer D. A. (1989). Is Public Expenditure Productive? Journal of Monetary Economics, 23,117-200.Balasubramanyam V. N., Salisu M. and Sapsford D. (1996). Foreign Direct Investment andGrowth in EP and Is Countries. The Economic Journal, 106, 92-105.Balasubramanyam V. N., Salisu M. and Sapsford D. (1999). Foreign Direct Investment as anEngine of Growth. Journal of International Trade and Economic Development, 8:1, 27-40Bannerjee A., Dolado J., Galbraith J. W. and Hendry D. F (1993). Integration, Error Correction,and the Econometric Analysis of Non-Stationary Data. Oxford: Oxford University Press.Bengoa M. and Sanchez-Robles B. (2003). Foreign Direct Investment, Economic Freedom andGrowth: New evidence from Latin America. European Journal of Political Economy, 19, 529-545.Bhagwati J. N. (1978). Anatomy and Consequences of Exchange Control Regimes. Studies inInternational Economic Relations, Vol. 1.30

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Bhagwati J. N. (1985). Investing Abroad, Esmee Fairbain Lecture. Lancaster University.Blalock, G. and Gertler, P. (2005). Welfare Gains from Foreign Direct Investment throughTechnology Transfer to Local Suppliers. Journal of International Economics.Blin M. & Ouattara, B. (2009). Foreign Direct Investment and Economic Growth in Mauritius:Evidence from Bounds Test Cointegration. Economie Internationale, CEPII research center,issue 1Q, 47-61.Blomström M. (1992). Host Country Benefits of Foreign Investment. NBER Working Papers3615.Blomström, M and Kokko A. (1997). Regional Integration and Foreign Direct Investment - AConceptual Framework and Three Cases. Policy Research Working Paper, 1750, World Bank,International Economics Department, International Trade Division.Blomström, M., Robert E. Lipsey, and Zejan, M. (1994). What Explains the Growth ofDeveloping Countries? In Baumol, William J., Nelson, Richard R. and Wolff, Edward N. (eds.),Convergence of Productivity, Oxford University Press, New York: 243-256.Blonigen B. A. and Wang, M. (2005). Inappropriate Pooling of Wealthy and Poor Countries inEmpirical FDI Studies, in Moran T. Graham E. and Blomström M. (eds.). Does Foreign DirectInvestment Promote Development? Institute for International Economics, Washington D.C.Borensztein E. J., Gregorio J. D. and Lee J. W. (1995). How does Foreign Direct InvestmentAffect Economic Growth? National Bureau of Economic Research Working Paper, 5057.31

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Borensztein E., Gregorio J. D. and Lee J. W. (1998). How Does Foreign Direct InvestmentAffect Economic Growth? Journal of International Economics, 45, 115-135.Borensztein, E., J. De Gregorio, and Lee, J.W. (1995). How does Foreign Direct InvestmentAffect Economic Growth? National Bureau of Economic Research Working Paper, 5057.Bosworth B. P. and Collins S. M. (1999). Capital Flows to Developing Economies: Implicationsfor Saving and Investment. Brookings Papers on Economic Activity, 6, 145 - 165Braunstein E. and Epstein G. (2004). Bargaining power and foreign direct investment in China:Can 1.3 billion consumers tame the multinationals? in Milberg W.(ed.), Labour and theGlobalization of Production, Palgrave Macmillan, London.Brown R. L., Durbin J. and Evans J. M., (1975). Techniques for Testing the Consistency ofRegression Relations Over Time. Journal of the Royal Statically Society, 37, 149-92.Castellani D. and Zanfei A. (2001). Technology Gaps, Absorptive Capacity and the Impact ofInward Investment on Productivity of European Firms. Mimeo, ISE Universita di Urbino.Caves R. E. (1974). Multinational corporations, competition and productivity in host-countrymarkets. Economica, 41, 176-193.Chakraborty C. and Basu, P. (2002). Foreign Direct Investment and Growth in India: ACointegration Approach. Applied Economics, 34, 1061-73.Chenery, H.B. and Strout, A.M. (1966). Foreign Assistance and Economic Development. TheAmerican Economic Review, Volume LVI, Number 4, Part I.32

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Choe J. (2003). Do Foreign Direct Investment and Gross Domestic Investment PromoteEconomic Growth? Review of Development Economics, 7, 44-57.Davidson, R. and MacKinnon, J.G. (1993). Estimation and Inference in Econometrics. OxfordUniversity Press.De Gregorio (1992). Economic growth in Latin America. Journal of Development Economics,Elsevier, vol. 39(1), 59-84, July.De Mello R. (1997). Foreign Direct Investment in developing Countries and Growth: A SelectiveSurvey. The Journal of Development Studies, 34, 1-34.De Mello R. (1999). Foreign direct investment-led growth: evidence from time series and paneldata. Oxford Economic Papers, 51, 133-154.Dees S. (1998). Foreign Direct Investment in China: Determinants and Effects. Economics ofPlanning, 31, 175-94.Devarajan, S., V. Swaroop, and Heng-fu Zou (1996). The Composition of Public Expenditureand Economic Growth. Journal of Monetary Economics Vol. 37, pp. 313-344.Dickey D. and Fuller W.A. (1979). Distribution of the Estimates for Autoregressive Time Serieswith Unit Root. Journal of the American Statistical Association, 74, 427-31.Djankov S. and Hoekman B. (2000). Foreign Investment and Productivity Growth in CzechEnterprises. World Bank Economic Review, 14, 49-64.33

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225DurhamB. J. (2004). Absorptive Capacity and the Effects of Foreign Direct Investment andEquity Foreign Portfolio Investment on Economic Growth. European Economic Review, 48,285-306.Engle, R. F. and Granger C. W. J. (1987). Co-integration and Error Correction: Representation,Estimation, and Testing. Econometrica, 55, 251-276.Feder G. (1983). On Exports and Economic Growth. Journal of Development Economics, 12, 59-73.Fosu A. K. (1990). Export Composition and the Impact of Exports on Economic Growth ofDeveloping Economies. Economics Letters, 34, 67-71.Fosu and Magnus (2006). Bounds testing approach: an examination of foreign direct investment,trade, and growth relationships. MPRA Paper 352, University Library of Munich, Germany.Fry M. J. (1992). Foreign Direct Investment in a Macroeconomic Framework: Finance,Efficiency, Incentives and Distortions. PRE Working Paper, Washington, DC: The World Bank.Goldsmith R. W. (1969). Financial Structure and Development. New Haven, Yale UniversityPress.Granger C.W.J, and Newbold P. (1974). Spurious Regressions in Econometrics. Journal ofEconometrics, 26, 1045-1066.Granger, C.W.J, (1986). Developments in the Study of Cointegrated Economic Variables‟,Oxford Bulletin of Economics and Statistics. Department of Economics, University of Oxford,vol. 48(3), pages 213-28, August.34

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Griffin, K. and Enos, J. (1970). Foreign Assistance, Objectives and Consequences. EconomicDevelopment and Cultural Change 18.Gunnar Myrdal (1957). Economic Theory and Underdeveloped Regions. London: UniversityPaperbacks, Methuen.Hall, R. E. and Jones C. (1999). Why Do Some Countries Produce So Much More Output perWorker than Others? Quarterly Journal of Economics, Vol. 114, pp. 83-116.Hanson, Gordon H. (2001). Should Countries Promote Foreign Direct Investment? ResearchPapers for the Intergovernmental Group of Twenty-Four on International Monetary Affairs,United Nations Conference on Trade and Development. New York: United Nations, G-24Discussion Paper Series, No. 9.Harris, R. and Sollis, R. (2003). Applied Time Series Modelling and Forecasting. West Sussex:Wiley.Haskel, J. E., Pereira, S. C. and Slaughter, M. J. (2002). Does Inward Foreign Investment Boostthe Productivity of Domestic Firms? NBER Working Paper, No. 8724.Herzer, D., Nowak-Lehmann, D.F. and Siliverstovs, B. (2006). Export-led growth in Chile:Assessing the role of export composition in productivity growth. The Developing Economics,44:(3)Inder, B. (1993). Estimating long-run relationships in economics: A comparison of differentapproaches. Journal of Econometrics, 57, 53-68.35

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Johansen, S. (1995). Likelihood-based Inference in Cointegrated Vector Autoregressive Models.Oxford: Oxford University Press.Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inference oncointegration-with application to the demand for money. Oxford Bulletin of Economics andStatistics, 52, 169- 10.Kokko, A., (1994). Technology, Market Characteristics, and Spillovers. Journal of DevelopmentEconomics, 43:279-93.Kokko, A., Tansini, R.et al. (1996). Local Technological Capability and Productivity Spilloversfrom FDI in the Uruguayan Manufacturing Sector. Journal of Development Studies, 32(4):279-93.Kremers, J., Ericsson, N., Dolado, J. (1992).The Power of Cointegration Tests. Oxford Bulletinof Economics and Statistics 54: 349-67Li, X. and Liu, X. (2005). Foreign Direct Investment and Economic Growth: An IncreasinglyEndogenous Relationship. World Development.Lim, D. (1983). Fiscal incentives and direct foreign investment in less developed countries.Journal of Development Studies, 19, 207–212.Lipsey, R.E. (2000). Inward FDI and economic growth in developing countries. TransnationalCorporations, 9: 61-95.36

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Lipsey, R.E. (2002a). Foreign Production by U.S. Firms and Parent Firm Employment. in RobertE. Lipsey and Jean-Louis Mucchielli, Edited, Multinational Firms and Impacts on Employment,Trade, and Technology: New Perspectives for a New Century, London, Routledge.Lipsey, R.E. (2002b). Foreign Direct Investment and the Operations of Multinational Firms:Concepts, History, and Data. in James Harrigan, Edited, Handbook of International Economics,Oxford, Blackwell.Lipsey, R.E., and Sjöholm, F. (2005). The Impact of Inward FDI on Host Countries: Why SuchDifferent Answers? in Moran, Graham, and Blomström, Editors (2005).Makki, S and Somwaru, A (2004). Impact of Foreign Direct Investment and Trade on EconomicGrowth: Evidence from Developing Countries. American Journal of Agricultural Economics, 86,795-801Mattaya, C.S. and Veeman, M.M. (1996). The Behaviour of Private and Public Investment inMalawi. Canadian Journal of Economics, Vol. 29, Special Issue: Part 2, S438- S442Melitz, Marc J., (2005). When and how should infant industries be protected? Journal ofInternational Economics, Elsevier, vol. 66(1), 177-196, May.Mody, A. and Wang, F. (1997). Explaining Industrial Growth in coastal China: EconomicReforms… and what else? World Bank Economic Review, 11 (2): 293-325Nair-Reichert, U. and D. Weinhold (2001). Causality tests for cross-country panels: a new lookat FDI and economic growth in developing countries. Oxford Bulletin of Economics andStatistics, 63 (2), 153-171.37

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Ng, S. and Perron, P. (1995). Unit Root Tests in ARMA Models with Data-Dependent Methodsfor the Selection of the Truncation Lag. Journal of the American Statistical Association, 90, 268-281.Niels, H. and Lensink, R. (2003). Foreign Direct Investment, Financial Development andEconomic Growth. Journal of Development Studies, 40(1), 142-63.Nurkse, R. (1953).Problems of Capital Formation in Underdeveloped Countries. Oxford: BasilBlackwell.OECD (1998), „Harmful Tax Competition - An Emerging Global Issue‟.Oliva, M.A. & Rivera-Batiz, L.A, (2002). Political Institutions, Capital Flows, and DevelopingCountry Growth: An Empirical Investigation. Review of Development Economics, WileyBlackwell, vol. 6(2), 248-62, June.Ouattara, B. (2004). The Impact of Project Aid and Programme Aid on Domestic Savings: ACase Study of Côte d'Ivoire. Centre for the Study of African Economies Conference on Growth,Poverty Reduction and Human Development in Africa.Ouattara, B. (2005). A New Database on Project Aid and Programme Aid Disbursements and aRe-examination of the Aid-Savings Nexus. The School of Economics Discussion Paper Series0501, Economics, The University of Manchester.Panopoulou, E. and Pittis, N. (2004). A comparison of autoregressive distributed lag anddynamic OLS cointegration estimators in the case of a serially correlated cointegration error.Econometrics Journal, Royal Economic Society, vol. 7(2), 585-617, December.38

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Pesaran, H. and Pesaran, B. (1997). Microfit 4.0 for Windows. Oxford University press andPolyhedron Software LTD.Pesaran, M. H. and Shin, Y. (1998). An Autoregressive distributed lag modeling approach tocointegration analysis. in S. Storm, ed., Econometrics and Economic Theory in the 20thCentury:The Ragnar Frisch Centennial Symposium, Cambridge: Cambridge University Press.Pesaran, M.H., Shin, Y. and Smith, R.J. (2001). Bounds testing approaches to the analysis oflevel relationships. Journal of Applied Econometrics, 16, 289-326.Phillips, P.C.B. and Perron, P. (1988).Testing for a Unit Root in Time Series Regression.Biometrica, 75, 335-446.Prüfer, P and Tondl, G. (2007). Does it Make a Difference? Comparing Growth Effects ofEuropean and North American FDI in Latin America. Proceedings of the German DevelopmentEconomics Conference.Rahman, M.A. (1968). Foreign capital and domestic savings: A test of Haavelmo‟s hypothesiswith cross-country data. Review of Economics and Statistics, 50, 137-138.Rodrik, D., Subramanian, A., Trebbi, F. (2002). Institutions Rule: The Primacy of Institutionsover Geography and Integration in Economic Development. Harvard University.Rosenstein-Rodan, P. (1943). Problems of Industrialization of Eastern and South-EasternEurope. European Journal 53 (210-211) June-September: 202-211Rosenstein-Rodan, P. (1961). International Aid for Underdeveloped Countries. Review ofEconomic Statics v 43.39

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Rostow (1960). The process of economic growth. (2nd ed.) Oxford, England: Clarendon PressRoy and Van den Berg (2006).The U.S. Current Account Deficit and the U.S. Economy: ATime-Series Investigation. presented at the Allied Social Science Associations meetings inBoston, MA.Saggi, K. (2000). Trade, Foreign Direct Investment, and International technology Transfer: ASurvey. Issued as WT/WGTI/W/88, dated 19 September 2000, Geneva: World TradeOrganization.Singer, H.W. (1949). Economic Progress in Underdeveloped Countries. Social Research.Subramanian and Roy (2001). Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs,or Rodrik? IMF Working Paper 01/116Ukpolo, V. (1994). Export composition and growth of selected low-income African countries:Evidence from time-series data. Applied Economics, 26: 445-449.Verbeek, M (2000). A guide to modern Econometrics. Chichester: John Wiley & SonsWorld Bank (2001). Global Development Finance 2001. Washington, D.C.Yudayeva, K., Kozlov K., Melentieva N, and Ponomareva N. (2000). Does Foreign OwnershipMatter? Russian Experience. Working Paper, No. W0005, Centre for Economic and FinancialResearch, Russia.Zhang, K.H., (2001). Does Foreign Direct Investment Promote Economic Growth? Evidencefrom East Asia and Latin America. Contemporary Economic Policy, 19 (2), 175-85.40

010 20 30 4050000100000 150000 200000rgdpcCapital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Annex 1: Data plotsrgdpc1970 1980 1990 2000 2010YearGdfcf, fdi1970 1980 1990 2000 2010Yearprivfdigdfcfpubfdi141

05040 60 80100Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Road, edu, m2 and absorbAnnex 1(Cntd.)1980 1990 2000 2010Yearm2eduroadabsorbTrade100 1501970 1980 1990 2000 2010Yeartradegdstradetradeserv42

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225corporate tax relative to direct income taxAnnex 1(Cntd.)30 40 50 60 70tax1970 1980 1990 2000 2010Year43

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Annex 2: Plots of cusum and cusumsq of recursive residualsModel rgpdcPlot of Cumulative Sum of Recursive Residuals151050-5-10-151977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelPlot of Cumulative Sum of Squares of Recursive Residuals1.51.00.50.0-0.51977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelModel 1(fdi)Plot of Cumulative Sum of Recursive Residuals20151050-5-10-151977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelPlot of Cumulative Sum of Squares of Recursive Residuals1.51.00.50.0-0.51977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelModel 1(priv)Plot of Cumulative Sum of Recursive Residuals151050-5-10-151977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelPlot of Cumulative Sum of Squares of Recursive Residuals1.51.00.50.0-0.51977 1982 1987 1992 1997 2002 2007 2010The straight lines represent critical bounds at 5% significance levelModel 1(pub)Plot of Cumulative Sum of Recursive Residuals151050-5-10-151978 1983 1988 1993 1998 2003 2008 2010The straight lines represent critical bounds at 5% significance levelPlot of Cumulative Sum of Squares of Recursive Residuals1.51.00.50.0-0.51978 1983 1988 1993 1998 2003 2008 2010The straight lines represent critical bounds at 5% significance level44