Gift Kasika
Government investments are spending by the State in business or assets through central or local governments, or through publicly-owned industries and corporations. Government projects are administered on different motives other than profit-oriented private investments.
In a free market economy, government investments are supposed to be limited to areas where the private sector is not interested, or in essential services such as health and related social services whereby when left in the hands of the private sector alone, the majority of people will be unable to afford the services due to high costs.
Government investments in public goods such as transport infrastructure, green hydrogen and other utilities are justified because the private sector is unable to deliver the services at affordable rates to the general public.
There are areas where the presence or involvement of government creates some undesirable results, specifically in a free market economy like ours.
In recent years, there have been a number of government investments in certain sectors where the private sector is heavily present, notably Namcor in the petroleum business, as well as the banking sector during the era of the now-liquidated SME Bank. The government’s investment in this area is not desirable in a free market economy because it creates a scenario called crowding out.
Crowding out refers to a situation whereby rising government investment drives down or even eliminates private investments.
The theory of crowding out suggests that
when the government increases its spending, it will increase the demand for goods and services, which can lead to higher interest rates and inflation.
This, in turn, can make borrowing more expensive for private investors, reducing their ability to invest in new projects and businesses. As a result, private investment may decrease or “crowd out” as government investments increase. The effect of crowding out can also occur through the use of monetary policy.
When the central bank increases the money supply to finance government spending,
it can lead to inflation and higher interest rates.
This can make borrowing more expensive for private investors, and reduce their ability to invest in new projects and businesses.
It is important to note that crowding out is not a universally accepted theory, and there are other arguments which suggest that government spending can have a positive impact on private investment. In other instances, government spending can increase economic activity and boost private investment. Thus, the crowding out effect is still a matter of debate among economists, and it’s important to consider the specific economic conditions of a country when evaluating the potential impact of government spending.
Government’s investment in public utilities such as roads and railways is justified because the private sector will be unable to recover their invested funds if they invest in such areas.
Namibia is characterised by low population density, which is one of the social factors hampering economic development. Low population density results in higher transport costs from one area to another, resulting in poor economic linkages. As a result, economic activities such as farming end up on a subsistence basis. Communities, specifically in rural areas, are cut off from the main economic centres of the country.
They find themselves located so far from infrastructure such as roads, markets, health services, schools and other economic facilities.
This makes it difficult for the locals to access support and assistance, and it becomes an impediment to attract investors in isolated areas. In better-connected communities, families are able to come out of poverty and get on with their lives, but those in remote and less accessible communities suffer for longer periods. Another challenge that merits government’s efforts in order to accelerate investments is corruption.
Corruption is one of the major factors responsible for low economic development in developing countries, and places a heavy cost on society.
Corruption increases the cost of doing business through the price of illicit payments, the management cost of negotiating with officials, and the risk of breached agreements or detection. When leadership is not transparent and accountable, resources demarcated for social projects end up elsewhere other than for their intended purposes. Corruption generates economic distortions in the public sector by diverting public investment into capital projects, where bribes and kickbacks are more plentiful.
* Gift Kasika is a local
economist.