How Would Population Growth Affect Investment in the Future? Asymmetric Panel Causality Evidence for Africa

Abstract

Our generation is experiencing the greatest demographic transition and Africa is at the center of it. There is mounting concern over corresponding rising unemployment and depleting per capita income. We examine the issues in this paper from a long-run perspective by assessing the relationships among population growth and a plethora of investment dynamics: public, private, foreign and domestic investments. Using asymmetric panels from 38 countries with data spanning from 1977 to 2007, our findings reveal a long-run positive causal linkage from population growth to only public investment. But for domestic investment, permanent fluctuations in human capital affect permanent changes in other forms of investments. Robustness checks on corresponding short-run Granger causality analysis and the long-run ‘physical capital led investment’ nexus are consistent with the predictions of economic theory. As a policy implication, population growth may strangle only public finances in the long-run. Hence, the need for measures that encourage family planning and create a conducive investment climate (and ease of doing business) for private and foreign investments. Seemingly, structural adjustments policies implemented by sampled countries may not have the desired investment effects in the distant future.

Keywords: productivity; investment; human capital; asymmetric panel; causality; Africa.

JEL Classification: C33; J00; O10; O40