Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis

Abstract

The paper undertakes an empirical investigation of key macroeconomic factors affecting private investment in the South Pacific developing member countries (SPDMCs), namely Fiji, Kiribati, Solomon Islands, Tonga, Vanuatu, and Western Samoa. The study finds that instability in the real exchange rate had a sizeable adverse effect on private investment. This particular instability is a product of many uncertainties, reflecting the SPDMCs' structural rigidities as well as fiscal and monetary imbalances. On the other hand, growth in output had an expansionary effect on private investment, although of a low magnitude, while public investment had a contractionary influence. The SPDMCs' macroeconomic management needs vast improvements. Annual fiscal balances should be reduced and rising recurring expenditures that encroach upon domestic savings should be kept under control. These measures would contribute to maintaining low inflation and reducing the variability in inflation and the real exchange rate.