This paper analyzes the determinants of private investment in the Caribbean region, using data for 1977-91. Drawing on the endogenous growth literature, it develops a model to capture the impact of public education expenditures on private sector capital formation. The implications of this model are tested in the context of a simple econometric model that evaluates the impact of education expenditures and other variables on the ratio of private investment to GDP.
Confirming the implications of the theoretical model, the econometric results reveal that public education expenditures appear to have a significant effect on private investment. Ceteris paribus, a country that sustains a 1 percentage point increase in the ratio of public education expenditures to GDP would experience an increase of 1 percentage point in the private investment/GDP ratio. The econometric results also show that economic growth has a positive impact on the share of private investment in GDP, with a 1 percentage point increase in economic growth rates being associated with an increase of 1 1/2 percentage points in the private investment/GDP ratio. Public investment has an adverse effect on private sector capital formation, even when central government capital expenditure is used as a measure of public investment. Real interest rates and external debt burdens are found to have no statistically significant relationship with private investment rates. The insignificance of the external debt overhang may reflect the highly concessional nature of much of the foreign debt held by Caribbean countries.
Correlation analysis reveals that both private and total investment rates are high in countries that mobilize a large amount of national savings. High national savings, in turn, are associated with low budget deficits. Countries with the highest growth in the region tended to have high rates of national savings and private investment, relatively low budget deficits and external debt, and relatively high real interest rates.