Latin American Investment Perfomance During the 1980-2002 Period: A Panel Cointegration Approach

This paper seeks to test empirically some of the major economic reasons for Latin America(s poor investment performance since the onset and aftermath of the debt crisis. In so doing, it attempts to uncover those economic relationships and policies that need to be promoted in order to raise and sustain the rate of private capital formation. The paper is organized as follows. Section I motivates the empirical model by focusing on the stylized facts regarding Latin America(s investment performance in comparison to selected East Asian countries. Section II presents a modified investment model that pools both cross-section and time-series data for nine major economies of Latin America over the 1980-2002 period. The information contained in the time series data is thus enhanced by the cross-sectional (country) data which makes it possible to reliably test whether the included variables are important determinants of real private capital formation in the region during the period under review. Section III presents the results for the pooled investment model, including recently developed panel unit root tests to the relevant variables to determine if they are stationary. It also applies a panel (and group) cointegration test developed by Pedroni [1999] to determine whether there is a stable long-term relationship among the relevant panel regressors of the modified pooled investment function. The last section summarizes the findings and offers some policy prescriptions for improving the investment climate in Latin America and the Caribbean.