The Impact of Gross Capital Formation on Economic Growth: Evidence from Tajikistan

Abstract

In this thesis, I focused on the impact of investment on economic growth for the case of Tajikistan. Gross capital formation is used as a proxy for investment. The increase in real Gross Domestic Production (GDP) is used as a proxy for economic growth. While the positive impact of gross capital formation on economic growth in developing countries is mentioned by theoretical literature and proved by many empirical studies, still some researchers show statistically insignificant or weak relationship between gross capital formation and increase in GDP. The researchers, who argue for an insignificant relationship between gross capital formation and economic growth, have referred to some pre-conditions which decrease the positive impact of investment on economic growth. The large share of public investment, the small share of private saving and investment by households, and poor business conditions, especially for small and medium enterprises are some prominent examples of those pre-conditions. Referring to theories of economic growth I applied some econometric models such as ordinary least squares (OLS), vector autoregression (VAR), Granger causality test and impulse response function (IRF) with quarterly data for the period from the first quarter of 2000 to the second quarter of 2017 in estimations. Considering unit root and muticollinairety between independent variables I used centered first difference logarithmic values of seasonally adjusted real quarterly data. Poor quality of data presented by national statistics of Tajikistan is a barrier for conduction of research on the relationship between macroeconomic variables. Under the supervision of my supervisor, I have prepared time series from the raw data presented by national statistics of Tajikistan. These data are appropriate enough for using in econometric models which I have chosen for my research. 9 The research results highlight the relationship between gross capital formation and economic growth in Tajikistan for last 17 years. Also, the estimation results show how the impact of gross capital formation on economic grows changes quarter by quarter. The research includes important information about the macroeconomic situation and business conditions in Tajikistan. I also offered my suggestion for improvement of investment climate in Tajikistan, enhancement of private saving and investment and improvement of the business conditions which increase the positive impact of gross capital formation on economic growth and economic development.