South Pacific Stusy Vol. 18, No. 2, 1998

Private Investment in Fiji: 1977-1994
Did Government Investment Have Any Crowding-out Effect ?
T. K. JAYARAMAN ＊Abstract

Private investment in Fiji has been stagnant since the mid eighties. This paper seeks to undertake an analysis of
the causes behind the stagnation. The empirical analysis shows that government investment had a crowding-out
effect on private investment despite its emphasis on public infrastructure. However, the relationship between thetwo is not robust. On the other hand, the relationships between private investment and growth expectations andpast behaviour are statistically highly significant. Another major factor of importance which also emerged withstatistical significance is the political climate which has been found not conducive for private investment. The
immediate issue that has to be dealt with by government is with regard to improvement in private investor
confidence.
Key words: crowding-out effect, private investment, political uncertainties, constitution review, investor confidence

Introduction
Private investment has been stagnant in the South Pacific island countries (SPICs)
during the last decade and the trend still seems to be persisting. Fiji is no exception.
Although the country has a better manufacturing base as well as relatively abundant naturaland human resource endowments than other SPICs, persistent ethnic-oriented politicalproblems and the uncertainties associated with the constitutional review seemed to have hadan adverse impact on the private sector’s investment decisions. Further, there has been aslow implementation of public sector reforms, which were initiated from the late eighties
and continued in the early nineties. One nagging question is whether Fiji’s public sector in
the past has been a drag and whether it crowded out private investment.
As the government investment in Fiji from the seventies has had heavy emphasis on
major physical infrastructure facilities, the question deserves careful examination, sincethese infrastructures are expected to contribute to the profitability of investment, thereby
promoting the private investment rate. It was brought out in a six-country cross-sectional
study of macroeconomic environment determining private investment behaviour for aperiod of eight years (1983-1990), that government investment in the South Pacific wasgenerally competitive with rather than complementary to private investment (JAYARAMAN＊

Post-doctoral Research Scholar, Macmillan Brown Centre for Pacific Studies, the University of Canterbury,
Private Bag 4800, Christchurch, New Zealand.

58South Pacific Study Vol. 18, No. 2, 1998

1996). However, the study did not examine Fiji’s private investment behaviour for an
extended period with reference to the crowding-out effect of public investment on private
investment. The objective of this paper is to take up a study of resource competition between the public and private sectors in Fiji and examine whether the dominance of the
public sector did affect private sector initiatives and whether there was any reduced resource availability for the private sector.
The paper is organised into three sections. The first section gives a brief background of
Fiji’s economy with specific reference to investment in the public and private sectors. The
second section outlines the model employed for the empirical study and the third section
reports the results and offers some conclusions.

Background
Table 1 provides a comparative picture of private and public investment trends in six
SPICs (Fiji, Kiribati, the Solomon Islands, Tonga, Vanuatu, Western Samoa) for an eight
year period (1983-1990) for which data for all countries are available. For the six SPICs,
the average gross investment rate, which is defined as the ratio of gross investment to grossdomestic product (GDP) during the eight year period was 29 percent. The government
investment rate (the ratio of government investment to GDP) was 17 percent and private
investment rate (defined as the ratio of private investment to GDP) was 12 percent. Therehas, however, been considerable variation among the six countries in regard to the relative
importance of private investment as compared to government investment. In Western
Samoa, Kiribati, and Tonga, the government investment rate was much higher than private
investment rate. In Fiji and the Solomon Islands, both private and government investment
rates have been very similar. In Vanuatu, the private investment rate has been higher than
the government investment rate.
In Fiji, in respect of which data for a longer period is available dating back from the mid
seventies, we observe a perceptible fall in the gross investment as well as in private and
TABLE 1
Average Investment rates in Six Selected SPDMCs: 1983-1990

CountryFiji＊
Kiribati
Solomon Islands
Tonga
VanuatuWestern Samoa＊

Gross Investment Private Investment
GDPGDP(ave.percent per (ave.percent
per
year)
year)
18.1
31.0
30.7
30.0
32.4
32.1

1983-1990
Source: World Bank (1995a)

9.2
12.0
15.1
10.4
20.4
5.6

Public Investment
Rate of Growth(ave.percent per
GDP(ave.percent
per year)
year)
8.9
19.0
15.6
19.6
12.0
26.5

2.4
0.8
3.2
2.1
2.8
1.0

Private Investment in Fiji: 1977-1994 Did Government Investment Have Any Crowding-out Effect ?

59

government investment rates. The gross investment rate fell from the all-time high of 26.5
percent in 1981 to a record low figure of 12 percent in 1988 (Table 2). A major reason forthis was a decreasing trend in the rate of government investment after 1982, as most of theinfrastructure construction activities initiated during the early 1970s were completed by1985 (TREADGOLD 1992).
During 1981-1985, as the government investment rate decreased, the private investment
rate rose to 12.2 percent in 1985 after an initial fall in the early 1980s. It was close to 10
percent in 1986 and 1987 but never recovered thereafter. As noted earlier, it appears that thetwo military coups of 1987 have had an adverse effect on private investment. However, it
is well recognised that there has been a clear downward trend in the gross investment rate
and the decline in the private investment was pronounced (FALLON and KING 1995, HUNTand CHANDRA 1995).
The immediate period following the two military coups in the second half of 1987
witnessed heavy capital outflows. With a view to stemming the outflows of capital, two
massive devaluations of the Fijian dollar by about 35 percent were resorted to. Despite asurge in domestic price level, these two nominal devaluations resulted in substantial depreciation of real currency exchange rate (JAYARAMAN 1997). Further, the temporary freeze
TABLE 2
FIJI: Private, Government and Total Investment to GDP (％) and Annual Real GDP Growth RateYearpi(％ of GDP)gi(％ of GDP)i(％ of GDP)

Real GDP Growth Rate

1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

6
4.4
10.6
12.2
13
13.6
12.3
10.2
9.8
10.3
12.2
9.9
9.9
6.8
6.3
5.4
5.5
4.9
4.7
4.7

8.5
11.6
8.9
9.1
10.1
11.7
14.2
13.4
11.1
6.8
6
4.8
5.8
5.2
6.2
10.3
6.8
6.9
8.8
7.8

14.5
16
19.5
21.3
23.1
25.3
26.5
23.6
20.9
17.1
18.2
14.7
15.7
12
12.5
15.7
12.3
11.8
13.5
12.5

0.1
2.7
4.4
1.8
12
-1.7
6.1
-6.3
-4.0
8.4
-5.1
8.3
-6.6
2.4
12.5
3.7
0.5
3.2
1.8
4.5

pi＝PI GDP
gi＝GI GDPi＝I GDP
Source: National Centre for Development Studies (1996)

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South Pacific Study Vol. 18, No. 2, 1998

on wages in the public and private sectors during 1987-89 and the limited wage settlements
below the variation in consumer price index, which were reached with public and private
sectors’ employees in 1990 were helpful. They improved not only the competitiveness ofexports but also contributed to the emergence of new export oriented industries, which
included garments and consumer goods, as distinguished from the traditional primaryprocessing industries such as sugar (SIWATIBAU 1993).
In addition, deregulation measures including reforms in the financial sector which wereintroduced in the late 1980s, encouraged the determination of interest rates by market
forces. Restrictions on capital movements were slowly relaxed from 1990. The country’s
outward looking strategy was further supported by tax reforms including the introduction ofa broad based value-added tax to replace cumbersome commodity trade taxes. Importlicenses were also replaced by low tariff rates.
Since 1990, the government took a few major steps towards reducing the role of public
sector and promoting private sector development. The efforts included downsizing the civil
service and pruning the budgets. In addition, the government aimed at fiscal stability bydeliberately trying to balance budgets. Measures for privatisation and corporatisation ofmajor public enterprises were set in motion. Deregulation in the labour market has also beenon the agenda of reforms. Although progress has been slow, the government’s commitment
is clear and private sector has seen the signals.
The emergence of new industries such as garment making in 1988 and 1989 kept theprivate investment at close 10 percent. The introduction of tax free factory and tax free zone
schemes also encouraged foreign direct investment activity. However, the private investment rate in the next four years declined. An increase in public investment during 19871990 failed to boost private investment which continued to remain sluggish. Since thedomestic saving rate of Fiji is fairly healthy at about 18 percent of GDP, which is thehighest among all SPICs (JAYARAMAN 1996), the inadequacy of domestic resources or lackof institutional arrangements for their channelling into investment in the face of wellestablished development finance agencies cannot be held as the causes for poor private
investment activity. HUNT and CHANDRA (1995), however, identified the continuing political uncertainties, the price of labour and the overvalued exchange rate as possible reasonsfor the lacklustre private sector performance. The recent concluded review of the country’s
current constitution and the announcement of political reforms, which would pave the way
for creation of a more equitable democratic state are expected to promote a better environment for private sector operations (The Review 1997).
As regards the macroeconomic environment affecting private investment in SPICs, a
recent study (JAYARAMAN 1996) has shown that private investment was indeed affected byadverse movements in real exchange rate. It should be noted, however, that instability in thereal exchange rate is a product of many factors and these include domestic budgetaryimbalances, wage rigidities and shortages which give rise to inflation, and inflexibility ineffecting changes in the nominal exchange rate. Turning to the question whether thePrivate Investment in Fiji: 1977-1994 Did Government Investment Have Any Crowding-out Effect ?

61

dominant role by the government was in any way responsible for poor private investment,
we have to examine the resource availability situation for the private sector. The next
section delineates the model to be employed for an empirical investigation.

The Model
Based on the contributions of WAI and WONG (1982), LIM (1982), private investment
can be hypothesised to be a function of government investment, the change in bank credit
and the inflow of foreign capital to the private sector. The government affects private
investment in several ways. If the resources are not fully employed, the government investment would lead to increases in income through multiplier effects, ultimately raising the
profitability of private investment as there would be expectations of increased demand forfinal products. It is also likely that if the government investment is in the area of physicalinfrastructure such as roads and electricity, the profitability of private investment would
increase as input costs would be lower. In both cases, private investment and government
investment are expected to be positively associated. On the other hand, if there is a near full
employment of resources, increases in government investment would lead to competition
for the limited investable resources and in the process, private investment would be subject
to crowding-out effects and hence it might decline. Thus, there is a possibility that therelationship between private and government investments might be negative. Hence, thetotal impact comprising the positive and negative effects might be uncertain, thus ruling out
any a priori conclusion about the relationship between the two.
However, one can be more certain about the relationship between private investment andcredit. Availability of bank credit, either short-term or medium-term loans would relievepressures on entrepreneurs for financing their day-to-day operations, thus enabling them todevote their own resources to a greater extent for capital investment. This is especially soin developing countries which are heavily dependent upon self-financing of investment in
the absence of a well-functioning capital market. Further, credit availability would facilitate
greater imports of capital goods, promoting domestic investment. External capital, either inthe form of trade credit, loans or equities, creates additional source of funds which also leadto greater investment. If the external capital takes the form of foreign direct investment(FDI), it may have greater potential of leading to further increases in domestic investment
as well, because of the linkage effects of FDI with domestic input requirements.
In a developing country, the dominance of the public sector is undeniably greater either
on the ground that private investment is dormant for historical reasons(JAYARAMAN 1995) or because of a facilitative approach deliberately adopted by thegovernment in investing in physical infrastructures for encouraging private investment by
providing inexpensive inputs as power, harbour facilities and road transportation(YU 1997). Consequently, the government might pre-empt the use of domestic credit and62South Pacific Study Vol. 18, No. 2, 1998

obtain external capital through grants from bilateral sources or loans from international
lending agencies. Any residual amount of resources, namely domestic credit available to theprivate sector after use by the government and the external capital inflows to private sector
which determine private investment, might be much less.
Utilising the above hypothesised relationships, we can construct a recursive model on thefollowing lines:
Rg ＝ f(GI) ……………………(1)Rp ＝ TR-Rg ……………………(2)PI ＝ f(GI, Rp, PI-1, GR-1) ……(3)where,
Rg ＝ Resources available to government, measured by changes in the banking system’s
claims on government and external capital inflows to government;
Rp ＝ resources available to private sector, measured by changes in the banking system’s
claims on private sector and external capital inflows to private sector;
TR ＝ total resources available to the economy, measured by changes in the banking
system’s total domestic credit and total external capital inflows;
PI ＝ private investment;
GI ＝ Government investment
The equation (1) states that resources used by the government are a direct function of
government investment. The equation (2) is an identity, as the resources available forprivate investment are only residual. The equation (3) shows that private investment is
influenced by government investment which might be in a positive manner, if the investment is of a complementary nature. It is also hypothesised that private investment is directly
related to resources available for the private sector and associated with expectations of thegrowth of the economy, which is represented by the lagged growth rate of the economy aswell as the past behaviour of private investment, which is represented by the lagged dependent variable.
The linear equations for estimation purposes, except (2) which is an identity, are:Rg ＝ a0＋ a1GI＋u …………………………………(4)PI ＝ b0＋b1GI＋＋b2Rp＋b3GR-1＋b4PI-1＋v ………(5)The coefficient b1 in equation (5) is the direct effect of government investment on
private investment, given the residual resources available to the private sector. The financial
crowding-out effect cannot be discerned from this equation, which can be arrived at only bydetermining the combined direct (complementary) and indirect (competitive or financial
crowding-out impact) effect of the government investment on private investment with theincorporation of the constrained resource availability. For this purpose, the reduced form offunctional relationship for estimation purposes is helpful, which is derived as follows:
PI ＝ c0＋c1GI＋c2TR＋c4PI-1＋c4GR-1＋w …………(6)where
c0＝b0-b2a0;
c1＝b1-b2a1;

Private Investment in Fiji: 1977-1994 Did Government Investment Have Any Crowding-out Effect ?

63

c2＝b2;
c3＝b3;
c4＝b4;andw＝composite disturbance term.
The combined direct and indirect effect of government investment is captured by c1, thecoefficient of GI, whereas the effects of the availability of total resources and past
behaviour on private investment are represented by c2 and c3 respectively. If the sign of c1
is positive, we can conclude that the total net effect of government investment is not only
complementary but also sizeable enough to more than compensate any competitive impact,ruling out any crowding-out effect. If the sign of the coefficient, on the other hand, isnegative, it would be established that the crowding-out effect is much more than the complementary effect. It is, however, expected that the signs of c2, c3 and c4 would be positive.
The next section presents empirical results.

Results of Empirical Analysis
Data for the eighteen-year period (1977-1994) have been drawn from three sources:
Asian Development Bank (1996), National Centre for Development Studies (1997), andIMF (1996). Three variables, namely PI, GI and TR were scaled to GDP and expressed aspercentages of GDP, whereas the annual GDP growth rate (GR) was in percent. The scaled
TABLE 3
Total Resources for Investment in Fiji: 1977-1994(as percent of GDP)
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

Change in Total Domestic
Net Annual Capital Inflows
Credit
4.5
6.1
0.8
4.5
4.9
4.2
2.4
2.1
2.2
4.7
-3.1
7.3
6.6
7.9
5.3
5.3
1.9

Source: Asian Development Bank (1996)

5.4
6.5
3.8
13.6
7.5
5.7
2.3
1.1
-0.5
0.4
-3.3
-0.8
3.3
-0.1
-0.6
4.4
3.1

Total
Resources
Domestic Investment
9.9
12.6
4.6
18.1
12.4
9.9
4.7
3.2
1.7
5.2
-6.4
6.5
9.9
7.9
4.7
9.8
5.0

for

64

South Pacific Study Vol. 18, No. 2, 1998

variables are denoted in lower cases, as pi, gi, and tr. The data employed in the analysis are
given in Tables 2 and 3.
In addition to the independent explanatory variables and the lagged dependent variable,
a dummy variable (D) was added in the estimation procedure with a view to capturing thedampening effects of the military coups of 1987 and their aftermath in the succeeding years,
on the dependent variable. The dummy variable assumed the value of zero for each year up
to 1986 and the value of unity for 1987 and each year thereafter. The equation (6) was
estimated by ordinary least squares method.
The estimated equation is as follows:
pi ＝ 5.205 - 0.261 gi＊＊ ＋ 0.081 tr ＋ 0.123 GR＊ ＋ 0.683 pi-1 ＊ - 3.235 D＊(2.743)(-1.699)(1.054)(2.816)(4.430)(-2.948)(Figures in parentheses denote calculated ’t’ values)
Adj.R2＝0.908 F - Ratio ＝ 32.529＊
significant at 5 percent level by one-tailed test＊＊
significant at 10 percent level by one tailed test
The results, which are presented in Table 4, show that the estimated equation is a fairly
TABLE 4
Regression Results(Dependent Variable: pi)
Variable
Constant
ig
tr
GR-1
Dummy
pi-1
Adj R sq.
Degrees of Freedom
F-RatioDiagnostic Tests
Auto Correlation Test
(Lagrange Multiplier test distributed as F)
Chi-Square Test
ARCH Test(Distributed as F)
Chi-Square TestWhite Test - F Ratio
Chi-Square Test
Ramsey Reset Test

Coefficients

p-values

5.206(2.743)-0.261(-1.700)
0.081(1.054)0.123(2.816)-2.691(2.948)0.683(4.430)0.908
1132.599

0.019

0.538

0.601

1.818
0.487

0.402
0.497

0.538
0.489
6.569
0.001

0.463
0.842
0.681
0.991

0.117
0.314
0.017
0.013
0.001

0.001

The figures in parentheses denote calculated ’t’ values p-values denote probability values
Source: Author’s calculations

Private Investment in Fiji: 1977-1994 Did Government Investment Have Any Crowding-out Effect ?

65

satisfactory fit in terms of fairly high adjusted R2 and F ratio. About 91 percent of variationsin private investment rate have been explained by the included variables. The high calculated F ratio and the associated low probability value (p-value) indicates the rejection of thenull hypothesis that all the estimated coefficients are jointly equal to zero. The diagnostic
tests for Lagrange multiplier chi-square and F ratio joint tests for serial correlation and the
ARCH test for heteroskedasticity, together with high probability values show that the null
hypotheses of no serial correlation and absence of heteroskedasticity cannot be rejected.
Similarly, the Ramsey RESET test statistic indicates that it is not possible to reject the null
hypothesis of no misspecification error. Thus, the estimation procedure, the functional form
adopted and the variables included in the equation are quite appropriate.
Among the explanatory variables, the estimated coefficient of total resources tr has
emerged with the expected positive sign, indicating that availability of total investable
resources is positively associated with private investment. However, it is not found significant even at 10 percent level. Among the others, we find the estimated coefficients of thelagged growth rate, the lagged dependent variable and dummy variable for political uncertainties have the theoretically expected signs and are found significant at 5 percent level.
These results confirm that the growth expectations and past private investment economic
growth and past behaviour have positively influenced private investment rate, whereas thepolitical uncertainties have had a negative impact. The estimated coefficient of government
investment rate, which had a negative sign indicating that the total composite effect was
negative apparently due to the dominance of competitive effect over complementary effect,
was significant at 10 percent level.

Summary and Conclusions
Private investment in Fiji has been sluggish ever since the mid-eighties. From an all timehigh of 12 percent of GDP in 1985, just before the two military coups had occurred in 1987,
it has been steadily falling and it reached the lowest in 1994, when it was just less than 5
percent of GDP. Total investment in the country has also been declining during the corresponding period, having fallen from the highest 21 percent in 1983 to 12 percent in 1994.
Although government investment was declining during the first half of the eighties due tocompletion of major physical infrastructure-oriented investments, witnessing the fall in
private sector investment, government tried to revive the investment climate by keeping up
its own rate of investment. There has not been any marked decline of resources for investment in general.
An empirical study utilising the availabel data was undertaken with the objective of
determining whether the dominant public sector had any crowding-out effect on private
sector investment. The empirical analysis has shown that (i) although government investment seems to have had a crowding-out effect, no robust inference can be drawn from theresults, as the level of significance is rather low; (ii) economic growth expectations and66

South Pacific Study Vol. 18, No. 2, 1998

past private investment behaviour have, however, had positive effects of highly significant
nature on private investment behaviour; and (iii) uncertainties, which are associated eversince the military coups, with the constitutional review and unsolved ethnic issues, especially land leases, have been eroding investor confidence.
The policy implications are obvious: the private sector should be given clear signals ofa positive commitment on the part of the government to solve land leases issues in favourof a better investment environment. Further, implementation of the recently announced
constitutional reforms should be earnestly begun and implemented expeditiously. These
steps would contribute to ending the lingering uncertainties, thereby improving the investment climate and raising growth expectations.

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Development, Canberra.
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(Accepted 19 December 1997)