Capital Formation and Economic Growth in Mauritius

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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
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Capital Formation and Economic Growth in Mauritius

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