SANEI: Completed Studies: Abstract

Savings, Investment and Growth in South Asia

The study has analysed the performance of the South Asian countries regarding the savings and investment rates and tried to compare it with East Asia. It has also carried out econometric analysis of the determinants of savings and investment ratios in South Asia.

Savings as a proportion of GDP is in the low to medium range for the South Asian countries as compared to the East Asian countries where it has been over 30 percent since 1980. The econometric analysis undertaken shows that the main factors behind the lower rates of savings in South Asia are: (a) a less rapid decline in the age dependency ratio (which has remained virtually stagnant in Nepal, Pakistan and Bangladesh), while falling dramatically in East Asia (and Sri Lanka), (b) the moderate to low rates of growth of GNP compared to East Asia, and (c) less prudent fiscal management by many South Asian governments (especially India, Pakistan and Sri Lanka) leading to low or negative public sector savings. Finally, interest rates on bank deposits were found to have a positive but insignificant effect on savings.

Similarly, gross fixed investment as proportion of GDP has also been lower in South Asia compared to East Asian countries. The econometric analysis suggests that availability of much smaller inflows of foreign direct investment and lesser availability of domestic credit are some of the main factors behind the lower investment rates in South Asian countries as compared to the East Asian countries.

An important focus of this study was on Granger causality analysis to test whether the high savings rates caused high growth or high growth rates led to high savings rates in the countries under consideration. The question is of vital significance for development policy. If high savings rates lead to high growth, development policy must focus on ways to increase the savings rate, while if high growth leads to high savings, development policy must focus on other factors which lead to high growth, such as human capital, technological progress and trade policy.

The study found evidence that higher savings rates cause higher growth rates of real GNP in two countries (Bangladesh ad Pakistan) and that higher growth rates Granger cause higher savings rates in two countries (India and Sri Lanka), with the results for Nepal failing to reject non-causality in either direction. The results for South Asian countries contrast sharply with the previous empirical findings (mostly based on data from East Asian countries, which have among the highest savings rates in the world) that savings rates do not cause growth but are determined by it.

A plausible conclusion from this analysis is that in the case of countries with low savings rates, low levels of savings may well become a significant constraint on growth by restricting the supply of funds available for capital formation and growth. Such a constraint may be absent in countries with relatively high levels of savings. If this hypothesis is correct, than it adds significantly to our understanding of the causality issues. Furthermore, the low savings rate countries, such as Bangladesh and Pakistan can not afford to be complacent, and need to be much more concerned about raising their savings rate as it may indeed be acting as a constraint on their GNP growth rates.

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