where _fA(.)_ , _f_ φ _(.)_ , and _fKG(.)_ are the profitability shock, financing cost, and public capital functions respectively.<sup>32</sup>

# **4.2 Estimation Methodology**

The private capital stock regressions presented above are estimated using the general method of moments (GMM), introduced by Holtz-Eakin, Newey, and Rosen (1988), Arellano and Bond (1991), and Arellano and Bover (1995).<sup>33</sup> The estimation involves differencing regression variables to control for country effects. The instruments consist of lagged values of dependent and independent variables.<sup>34</sup> This methodology also allows for endogeneity in the dependent variables.

To eliminate country-specific effects, we take the first difference of equation (8): where _MSIt_ = d _INFLt_ or d _CEERt_ ; _FVt_ = d _M_ 2 _t_ or d( _M_ 2- _M_ 1) _t_ or d _CREDITt_ ; _KPt_ = d _kppt_ or d _kpit_ .<sup>35</sup> The results are provided in Tables 2-5. In the regressions, we use 3-year averages to combine short-and long-run effects. These tables also report the Sargan and secondorder serial correlation specifications whenever the number of observation is large enough to calculate them. These tests indicate that we cannot reject the hypothesis of correct identification, which support the model specification and robustness of methodology. Standard errors and test statistics are robust to the presence of heteroskedasticity.

# **4.3 Empirical Results**

We derive the empirical specification of capital stock (predicted value) for each subpanel using equation (11) above, and compare the estimated function with actual values.<sup>36</sup> The main data sources are the World Bank Development Indicators, and Everhart and Sumlinski (2002). The regression analysis is based on a total number of 23 countries covering the period 1980-2003. Private investment series in the primary sector (agricultural

> 32 Other set of factors affecting private capital accumulation include the quality of governance and leadership. For instance, the quality of leadership may lead to a faster deterioration of capital infrastructure in turn lower private capital accumulation. However, due to missing data points, we did not include these factors in the empirical model. For further details on the implications of government policy for private investment, see Dailami and Walton (1992).

> 33 Since the number of countries is limited, especially after separating countries into different income groups, we could not use any methodologies that may allow us to separate short- and long-run determinants of private capital, such as pooled mean group estimator, introduced by Pesaran, Shin, and Smith (1999).

> 34 Due to the limited number of observations, we only included only the first lags of variables in the instrumental set.

> 35 d _kppt_ = 1n( _kppt_ ) – ln( _kppt-1_ ); d _kpit_ = 1n( _kpit_ ) – ln( _kpit-1_ ); d _GDPPCt_ = ln( _GDPPCt_ ) - ln( _GDPPCt-1_ ); d _INFLt_ = _INFLt_ – _INFLt-1_ ; d _CREERt_ = _CREERt_ – _CREERt-1_ ; d _kgt-1_ = 1n( _kgt-1_ ) – ln( _kgit-2_ ); d _M2t_ = _M2t_ – _M2t-1_ ; d _(M2M1)t_ = _(M2-M1)t_ - _(M2-M1)t-1_ ; d _CREDITt_ = _CREDITt_ – _CREDITt-1_ .

> 36 Some examples of empirical studies on private investment in Sub-Saharan Africa countries include Ghura and Goodwin (2000), Ndikumana (2000).

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