Unemployment, gross capital formation and economic growth in developing countries: a case study of Uganda

Abstract

This study investigates the interplay between unemployment, gross capital formation (GCF), gross domestic savings (GDS), and foreign direct investments (FDIs) with economic growth in developing countries, with a particular focus on Uganda. The study aims to determine the impact of these factors on economic growth, employing a robust quantitative methodology that includes univariate, bivariate, and multivariate analyses using secondary data from the World Bank spanning 1999 to 2022. The analysis incorporated natural logarithmic transformations to stabilize variance and improve the interpretability of the results, with robust Ordinary Least Squares (OLS) regression used to account for heteroskedasticity. The findings reveal that Gross Fixed Capital Formation (GCF) has the most significant positive effect on GDP growth, with a coefficient of 0.593 (p < 0.001), indicating that increased capital investment is strongly associated with higher economic growth. Foreign Direct Investments (FDIs) also positively impact GDP growth, with a coefficient of 0.088 (p = 0.045). In contrast, unemployment has a negative impact on GDP, with a coefficient of -0.199 (p = 0.013), suggesting that higher unemployment rates hinder economic growth. Gross Domestic Savings (GDS) shows a positive relationship with GDP growth, with a coefficient of 0.151 (p = 0.02), indicating that higher savings contribute to economic expansion. These results underscore the critical roles of capital formation, foreign investments, and savings in driving economic growth while highlighting the adverse effects of high unemployment. In conclusion, the study emphasizes the need for comprehensive strategies to address high unemployment, promote capital formation, and attract foreign investments to foster sustainable economic growth. Recommendations include enhancing job creation programs, increasing investments in infrastructure, promoting savings, and improving the investment climate for foreign investors. Future research should explore sector-specific impacts of these variables, the role of technology and innovation, and comparative studies across different developing regions to provide deeper insights into the dynamics affecting economic growth. This will help refine policies and strategies aimed at achieving robust economic development. Key terms: Unemployment, Gross Capital Formation, Economic Growth, Foreign Direct Investments, Gross Domestic Savings, Developing Countries, Uganda, Robust OLS.