Stylised Facts of Household Savings: Findings from the IDES 1993-94

Ashfaque H. Khan, Zafar Mueen Nasir


Saving, the fraction of national income that is not spent on
current consumption, has long been widely regarded as a key factor in
economic growth.1 The saving rate along with the incremental
capital-output ratio determine the growth rate of the economy in the
Harrod-Domar Model framework. The critical role of saving in capital
accumulation and economic development is also recognised in the
"two-gap" and classical growth models. For capital accumulation to
result in sustained growth, it must be supported by adequate
domestic/national savings. This has been clearly demonstrated by the
extra-ordinary performance of the East Asian economies. While there have
been brief periods of significant inflow of external financial resources
to some developing countries in the past, foreign savings cannot be
expected to provide a sustainable basis for financing domestic
investment. Raising' national saving rate is particularly essential to
developing countries with a heavy debt service burden and limited
capacity to obtain loans in foreign capital markets. The 1995 Mexican
crisis showed, among other things, that low domestic savings can raise
the probability of sudden capital outflows, and sharpen their negative
consequences. In a financially integrated world, high national/domestic
savings contribute to macro economic stability which is itself a
powerful growth factor. Indeed, any macro economic adjustment programmes
oriented to the resumption of long-run growth invariably emphasise the
need to expand domestic savings.

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