The correlation between savings, investments and growth rates
Abstract
The paper explores the correlation between savings, growth rates and investments. The foregoing has been able to establish that saving precedes and causes investments. Savings and investments influence economic growth rate and development in every country of the world. Nations experiencing shortfalls in domestic savings to finance domestic investment can borrow from international capital markets to meet the shortfall. Investment is not acquisition of financial assets such as stocks, mutual funds or bonds but it is purchase of capital goods such as plant and machinery which boost consumption and productivity. Keynes general theory holds that the higher the level of income a nation generates the higher the level of savings a nation records. The theory advances the argument that those who generate more revenue save more than those who do not. The lifecycle theory holds that saving is determined by the demographic characteristics of a nation. An aging population tends to save more than a young population. According to Feldstein Horioka theory the correlation between domestic saving and domestic investment is influenced by capital mobility. In cases where capital mobility is high the correlation is low and vice versa.
Table of Contents
Table 3.0 (d)—————————————————————————………………………………. 23
3.0 Correlation between savings, investments and growth rates. 11
List of Tables
Table 3.0 (a)—————————————————————————- 16
Table 3.0 (b)—————————————————————————- 25
1.0 Introduction
According to KLIESEN (2005) to the ordinary person saving and investment may mean one and the same thing; which is putting away a certain amount of income in some safe place so that it can accumulate to purchase financial assets which include stocks, mutual funds or bonds in future. The saver/investor does that with the hope that the rate of growth of these assets will be more than the prevailing inflation rates in the economy and therefore after a certain period of time he will gain some additional income from sale of these financial assets (KLIESEN, 2005).
Saving and investment mean something totally different to economists. According to KLIESEN (2005) economists view saving as the act of setting aside a certain amount of the current income or output to enable the individual or country to consume and/or produce more in the future. Investments according to economists involve purchase of capital goods such as plant and machinery as opposed to purchase of such financial assets of stocks, bonds and mutual funds. The aim though is to obtain a higher return in future which is more than the amounts invested (KLIESEN, 2005).Saving is therefore the activity of putting aside a certain amount of current income or output to produce or consume more in future. Investment is the purchase of capital goods that can be used to enhance consumption and income in future (KLIESEN, 2005).
According to KLIESEN (2005) countries utilize unspent national income by giving out loans to individuals and businesses or by issuing stocks and bonds to buy machinery, equipment and software. It is assumed that higher growth rates in the economy do occur as investment in capital goods rise resulting in an increase in living standards over time. Expenditure in research & development and training is also viewed by economists as investment in capital goods since it is aimed at increasing incomes in future (KLIESEN, 2005). According to KLIESEN (2005) without international trade the amount of saving of a country would be determined by the propensity of the country to save from the current income which would be equivalent to the GDP not used up by the government and households. This is the amount left to invest in capital goods such as machinery, equipment, education and research and development (KLIESEN, 2005).
However, the reality is that each country’s GDP has a foreign component added to it due to the fact that countries are engaged in international trade whereby goods and services move across national borders. This therefore means that apart from the domestic saving, countries also access foreign saving due to their international trading activities (KLIESEN, 2005). A country can hold foreign assets by buying mutual funds which hold shares in a company that trades in a foreign country. According to KLIESEN (2005) the total national saving of a country is determined by adding up the total business, government and households saving. The aggregate business saving is normally larger than the households saving in terms of magnitude. Government saving has traditionally constituted a small percentage of the total national saving of a country (ENGEN, GALE and SCHOLZ, 1996).
The economic growth rate of a country is directly proportional to the growth in its gross domestic product. According to economists gross domestic product (GDP) is made up of equipment, structures, and labor; which are the three main factors of production (GORT, GREENWOOD and RUPERT, 1999). Growth in gross domestic product of a country increases when there is an increase in any or all of the three factors of production. However, technological progress is not included in the three factors of production of equipment, structures and labour. To determine the contribution of technology in the growth of a country’s gross domestic product one has to first determine the part that has been contributed by the three main factors of production and what is left then constitutes the part of gross domestic product contributed by technology (GORT, GREENWOOD and RUPERT, 1999). It is important to note that input of the factors of production into the national GDP grows as a result of input arising from progress in the technological component (GORT, GREENWOOD and RUPERT, 1999).
According to EISNER (1995) saving is the accumulation of assets which are seen as investments when looked at in a different perspective. Eisner (1995) noted that investment adds to the productive capacity which results in economic growth of a country. For growth to occur, the economy must avail to the consumers the ability to purchase the goods and /or services produced by the investments. If that does not happen then the investment is denied the opportunity to contribute to the growth of the economy and this leads to a drop in investment. This occurs due to the fact that investors cut down on future investments due to losses that they make as a result of low demand levels of the goods and services that they produce (EISNER, 1995).
2.0 Background
The best method of enhancing national saving is by targeting to grow savings in all the three major components that make up national saving which include households, business and government savings. To grow households saving, national governments create incentives to encourage individuals to save (HOWE, 2003). Strategies that governments use to enhance household saving include creating expanded savings avenues, raising saving contribution upper limit, providing tax-free earnings, abolishing earnings limits and making it simple for citizens to choose which saving scheme or vehicle to use. These methods enhance household saving (HOWE, 2003). JHA, TERADA-HAGIWARA and PRASAD (2010) noted that corporate savings are enhanced by lowering corporate tax rates, customs duty, restructuring firms and reducing interest rates.
To enhance government saving, governments should reduce their defense budgets which eat into a large chunk of their national income (O HANLON, 1995). Many governments all over the world are facing a rapidly ballooning budget deficit making it almost certain that defense budget cuts will be considered as one of the strategies to reduce this deficit (O HANLON, 1995).According to Anonymous (2013) governments could also boost their liquid savings kitty by setting aside at least one percent of total income from productive sectors like mining, agriculture, power and energy, tourism etc. in a special rainy day account. This kind of strategy would boost savings in the long run (Anonymous, 2013). According to an article on South African economy: Boosting growth (2005) one of the major strategies of boosting economic growth rates is by maintaining a stable and competitive exchange rate which increases export volumes. The aim of this strategy to is to boost exports and foreign exchange reserves.
2.1 Savings
The importance of savings to the welfare of a society cannot be overemphasized. Many countries all over the world have used various strategies to enhance and inculcate savings culture among the populace. In Thailand for example His Majesty King Vajiravudh (Rama VI) in 1913, encouraged Thai people to save by founding banking services in Thailand. He initiated the Savings Office which currently is known as the Government Savings Bank (GSB) to encourage Thai people to save through the Savings Office (Anonymous, 2009). The government of Thailand has continued with that spirit of encouraging people to save as witnessed by the announcement in 1998 of the National Saving Day which is aimed at encouraging people to form a habit of saving regularly (Anonymous, 2009). According to SULTANA and SYED (2010) the saving of a country is made up of private and public saving. Private saving is made up of savings by individuals and businesses whereas public saving is made up of savings by the government sector.
Several theories have been formulated to explain what motivates people to save. The first of these is the Keynes’s fundamental psychological law also known as the Keynes’s General Theory. According to this theory people tend to save more as their incomes rise. The theory contends that the average and marginal propensity to save increases in tandem with increases in income levels (BARANZINI, 2005). This implies that increases in households, business and government incomes will result in an increase in the amounts saved in a given period of time.
Another theory that attempts to explain why people save is the life-cycle theory of consumption and savings which was formulated in early 1950s by Franco Modigliani, Albert Ando and Richard Brumberg (BARANZINI, 2005). According to the life-cycle theory the age structure of consumers in a country determine the level of savings. This therefore means that the demographic characteristics of a society rather than the level of income determine the level of savings. This implies that a nation with an ageing population tends to save more than one which has a young population; this is because as populations’ age, people tend to put aside a part of their incomes to enable them finance consumption during their twilight years (BARANZINI, 2005). The life cycle theory holds that consumption is continuous whereas income throughout the life-cycle of people tends to be discontinuous. Saving is therefore necessary to finance consumption during the times of income gaps and which are more likely to occur during retirement period (BARANZINI, 2005). The life-cycle theory implies that the rate of saving of a country is not dependent on the per capita income of the country at any one given point in time (BARANZINI, 2005).
2.2 Investments
According to TREYNOR (1993) real investment only occurs when private sector players purchase capital goods such as plant and equipment and invest in research & development, training etc. ARNOLD (2011) pointed out that a drop in domestic savings also leads to a drop in investments and growth rates. There are two types of investments; private investment and public investment. Private investment is undertaken by individual businesses whereas public investment is undertaken by governments and is a matter of policy choice (EISNER, 1995). Public investment includes investment in roads, bridges, schools, hydro-electric power stations, nuclear power plants and other public amenities. Public investment is not for profit and is the one that acts as a catalyst in attracting private business investments into a country. Indeed savings cannot be realized without investments (EISNER, 1995). Countries that have done well in public investment have also attracted a lot of private business investment. It is impossible to attract private business investment without investing heavily in public investment projects since public investment attracts private business investment into an economy (EISNER, 1995).
2.3 Growth rates
To spur high growth rates in the economy, some countries have resorted to reducing interest rates on deposits. This has had the effect of reducing interest rates charged on loans offered to businesses. These loan funds enable companies to invest more in capital goods that increase investment levels and thus lead to high growth in the economy (Anonymous, 2003). According to ALLAIRE (1996) it is possible to achieve high growth rates in an economy without accelerating inflation and this is through instituting policy changes that bring development partners to agree to pursue similar economic growth policies. Another strategy is by reforming the prevailing tax regime to promote investment, capital formation and savings. The tax systems should possess the qualities of predictability and stability ALLAIRE (1996). To achieve high growth rates public investment should also be enhanced and more specifically investment in public education, infrastructure, energy, mining and other public utility sectors. According to PLOSSER (1996) the only way a country can achieve good health and well-being for its population and including its future generations is by increasing the amount of savings it holds which is used in undertaking productive investments. This will ensure the standards of living continue to grow.
3.0 Correlation between savings, investments and growth rates
Solow’s type growth models formulated in 1956 postulated that saving precedes and is the main cause of economic growth. This therefore means that without saving economic growth will be a mirage. High saving comes before investment and is actually the main cause of investments in many countries in the world (ALGUACIL, CUADROS and ORTS, 2004).
According to AGRAWAL and SAHOO (2009) there is a strong correlation between the rate of growth of an economy and the rate of savings in a country. According to a report that appeared in Business Times (1996) the economy of Bangladesh was projected to grow by about 8.3 percent in 1996 due to continued monetary and fiscal constraint, favourable domestic and international environment and high investments in the economy. This clearly shows that the rate of economic growth also hinges on the level of investments. This means that there is also a correlation between investment and the growth rates in an economy. According to the foregoing we can logically deduce that there is a correlation between investments, savings and growth rates in an economy. MUHLEISEN (1997) wrote that in order to achieve higher growth rates to alleviate poverty in developing countries, policies should be put in place to enhance savings since higher growth is only achieved after a nation increases its savings level.
According to BARRO (2000) some economists drawing from Keynes’s General Theory hold that as incomes increase so does the rates of saving. Keynes’s General Theory holds that as the amount of income an entity generates increase so will be the amount of saving that the entity will put aside. The economists who support the theory support income inequality especially in developing countries by stating that it encourages saving which leads to high investment rates (BARRO, 2000). That is to say the few who own most of these countries resources tend to save more since their incomes are high and hence invest more.
Supporters of Keynes General Theory discourage redistribution of resources from those who are rich to the poor since that will lower the aggregate rate of saving which will affect investment levels (BARRO, 2000). This theory therefore supports a continual increase in inequality in income distribution among populations of developing countries. These economists hold that as income inequalities rise so does investment rates and by extension therefore economic growth rates. However, this theory holds in economies where investments depend on domestic saving and not foreign saving in which case economic growth would be enhanced by very high levels of income inequality (BARRO, 2000). This view has been opposed by a section of economists who hold that the purchasing power of the consumers of these investments products will need to be enhanced otherwise the investments will have to be scaled down due to inadequate demand which will reduce growth rates (BARRO, 2000).This view is therefore opposed to continual income inequality to grow investments in developing countries.
According to ÉGERT, KOZLUK and SUTHERLAND (2009) the rate of infrastructure development in a country is directly proportional to the rate of economic growth. A country can only invest in infrastructure if it can access national savings through issuance of debt instruments such as infrastructure bonds, treasury bonds and treasury bills to finance infrastructure projects (ÉGERT, KOZLUK and SUTHERLAND, 2009). Investment in infrastructure is a powerful incentive that enhances private investment’s appetite to acquire capital goods which increases productivity per worker thereby enhancing growth rates in a country (ÉGERT, KOZLUK and SUTHERLAND, 2009).
According to FELDKAMP (2001) the level of liquidity in an economy is essential for commerce to flourish. Without adequate national saving, liquidity in an economy will be severely affected. The available money will be very expensive and this will affect the growth rates in an economy. However, increasing liquidity has the potential of increasing the rate of inflation in a country. It is therefore a delicate balancing act between increasing liquidity by reducing interest rates to optimum levels and the imminent danger of increasing inflation rates by increasing liquidity levels (FELDKAMP, 2001).
A group of international experts conducted a comprehensive study under the auspices of the Commission on Growth and Development in 2011 and found out that sustainable growth in an economy requires high investment rates (Investment fuels emerging-market growth, 2011). The group noted that for rapid growth of an economy to occur the rate of investment as a percentage of GDP must be more than 25 percent and this must be sustained for a considerable period of time. The group also noted that countries that were fast growing tended to invest about 7 to 8 percent of their gross domestic product in education, health and training to boost their human resources (Investment fuels emerging-market growth, 2011). Asian tigers, a group of countries experiencing very high growth levels in Asia, were found to be committing a minimum of 5 to 7 percent of their gross domestic products in infrastructure development (Investment fuels emerging-market growth, 2011).
According to PLOSSER (1996) the ballooning trade deficit in the United States has been caused by the persistent low savings that have led to low investment levels. In the 1990’s Malaysia’s savings averaged 33.6 percent of gross national product; a level which was considered amongst the highest in all the countries of the world. This was considered as an indicator of high growth rates in the economy of the country (AHMED, 2010; ENGEN, GALE and SCHOLZ, 1996). We can deduce that the Asian tigers, of which Malaysia is, one of them, have managed to reduce their investment costs resulting in relatively cheaper destinations for investment as a result of high savings which have resulted in high growth rates. Cheap investment destinations attract foreign saving which enhances investment rates and by extension growth rates.
According to HERNANDEZ-CATA (2000) the solution to low economic growth rates in sub-Saharan African countries lies in adopting strategies that increase national saving levels with a view to increasing investment levels. Increased investment levels will result in high growth rates which will create jobs and alleviate poverty. The main challenge with that approach is that the rates of taxes and interest rates are very high in most of these countries making saving difficult (HERNANDEZ-CATA, 2000). According to EASTERLY (1991) developing countries are affected by inefficient policies that they formulate such as subsidies, price controls, and trade intervention which take up some of the investment funds that are meant to hasten economic growth rates. This misapplication of resources to activities that have a low economic return lowers the average productivity of investments which reduces growth rates in developing countries.
As an economy picks up momentum and starts reporting accelerated growth levels, capital stock depreciates fast and that requires that the savings rate be increased to enable additional investments to replace the depreciating capital items (WHITAKER, 2007). ALM and GOULD (1994) wrote that savings enhances economic growth as it promotes technological progress and investment. The factors that increases the efficiency in saving include; financial liberalization; low inflation; sound fiscal policy; stability and low inflation. Many countries still rely largely on their domestic savings to grow their economy even though foreign saving is becoming an important source of funds for investment in many developing countries (ALM and GOULD, 1994).
A different theory of viewing the relationship between saving and investment was pioneered by the work of Martin Feldstein and Charles Horioka in 1980.They found out that capital immobility in international markets fosters high correlation between domestic savings and domestic investments (JOSIC and JOSIC, 2012). According to Feldstein Horioka theory in environments of high capital immobility, domestic savings are used to finance domestic investment but in environments of perfect capital mobility there is low correlation between domestic investment and domestic savings. Investors in this type of an environment can borrow investment funds from international capital markets at prevailing prices and do not necessarily have to rely on domestic savings to finance domestic investments.
According to Feldstein Horioka theory domestic savers in a perfectly mobile capital markets do not necessarily need to raise savings from domestic sources but can source the savings from foreign markets at the prevailing rate (JOSIC and JOSIC, 2012). The theory however proves that there is a correlation between savings and investments and they are critical factors in a country’s economic growth and development. According to the theory, developing countries can borrow development finance from international lenders and do not necessarily have to rely on domestic savings. According standard economic theory, in countries where there is perfect mobility of capital and absence of government regulation, savings tend to move to those countries with investment opportunities that promise high returns. In this case domestic saving is not correlated with domestic investment.
Table 3.0 (a)
| Country | Subject Descriptor | Units | Scale | 2008 | 2009 | 2010 | 2011 | 2012 |
| Australia | Gross domestic product, constant prices | National currency | Billions | 1,335 | 1,354 | 1,389 | 1,423 | 1,474 |
| Australia | Total investment | Percent of GDP | 28.98 | 27.41 | 26.96 | 27.40 | 28.84 | |
| Australia | Gross national savings | Percent of GDP | 24.50 | 23.17 | 23.99 | 25.13 | 25.18 | |
| Austria | Gross domestic product, constant prices | National currency | Billions | 267.45 | 257.33 | 262.61 | 269.69 | 271.83 |
| Austria | Total investment | Percent of GDP | 22.79 | 21.05 | 21.60 | 23.21 | 22.81 | |
| Austria | Gross national savings | Percent of GDP | 27.66 | 23.76 | 25.00 | 23.78 | 24.79 | |
| Belgium | Gross domestic product, constant prices | National currency | Billions | 357.64 | 347.71 | 356.13 | 362.48 | 361.76 |
| Belgium | Total investment | Percent of GDP | 24.00 | 19.81 | 20.57 | 21.76 | 21.24 | |
| Belgium | Gross national savings | Percent of GDP | 22.69 | 18.40 | 22.48 | 20.35 | 20.75 | |
| Canada | Gross domestic product, constant prices | National currency | Billions | 1,583.2 | 1,538.8 | 1,587.6 | 1,628.3 | 1,658.2 |
| Canada | Total investment | Percent of GDP | 24.02 | 21.76 | 23.32 | 23.59 | 24.47 | |
| Canada | Gross national savings | Percent of GDP | 24.14 | 18.79 | 19.71 | 20.62 | 20.79 | |
| Czech Republic | Gross domestic product, constant prices | National currency | Billions | 3,635.3 | 3,471.5 | 3,558.0 | 3,625.2 | 3,579.9 |
| Czech Republic | Total investment | Percent of GDP | 28.94 | 23.85 | 24.90 | 24.57 | 24.34 | |
| Czech Republic | Gross national savings | Percent of GDP | 26.82 | 21.39 | 21.08 | 21.64 | 21.64 | |
| Denmark | Gross domestic product, constant prices | National currency | Billions | 1,610.3 | 1,519.0 | 1,543.0 | 1,560.0 | 1,551.1 |
| Denmark | Total investment | Percent of GDP | 22.37 | 16.93 | 16.78 | 17.60 | 17.32 | |
| Denmark | Gross national savings | Percent of GDP | 25.25 | 20.33 | 22.66 | 23.25 | 22.57 | |
| Estonia | Gross domestic product, constant prices | National currency | Billions | 12.68 | 10.89 | 11.26 | 12.19 | 12.59 |
| Estonia | Total investment | Percent of GDP | 29.97 | 18.45 | 20.25 | 24.76 | 27.63 | |
| Estonia | Gross national savings | Percent of GDP | 20.82 | 21.87 | 23.18 | 26.88 | 26.43 | |
| Finland | Gross domestic product, constant prices | National currency | Billions | 166.04 | 151.86 | 156.91 | 161.26 | 160.93 |
| Finland | Total investment | Percent of GDP | 22.22 | 18.52 | 18.51 | 20.89 | 18.74 | |
| Finland | Gross national savings | Percent of GDP | 24.85 | 20.27 | 19.98 | 19.31 | 17.71 | |
| France | Gross domestic product, constant prices | National currency | Billions | 1,799.2 | 1,742.6 | 1,771.6 | 1,801.6 | 1,802.1 |
| France | Total investment | Percent of GDP | 21.95 | 18.95 | 19.26 | 20.64 | 19.90 | |
| France | Gross national savings | Percent of GDP | 20.20 | 17.61 | 17.71 | 18.69 | 17.57 | |
| Germany | Gross domestic product, constant prices | National currency | Billions | 2,404.9 | 2,282.9 | 2,374.8 | 2,448.3 | 2,469.5 |
| Germany | Total investment | Percent of GDP | 19.26 | 16.46 | 17.49 | 18.26 | 17.22 | |
| Germany | Gross national savings | Percent of GDP | 25.47 | 22.42 | 23.74 | 24.48 | 24.23 | |
| Greece | Gross domestic product, constant prices | National currency | Billions | 210.43 | 203.83 | 193.75 | 179.99 | 168.49 |
| Greece | Total investment | Percent of GDP | 24.01 | 18.58 | 17.54 | 16.11 | 13.59 | |
| Greece | Gross national savings | Percent of GDP | 9.09 | 7.40 | 7.40 | 6.21 | 10.71 | |
| Iceland | Gross domestic product, constant prices | National currency | Billions | 946.42 | 884.29 | 848.05 | 872.56 | 886.86 |
| Iceland | Total investment | Percent of GDP | 24.57 | 13.87 | 12.462 | 14.35 | 14.55 | |
| Iceland | Gross national savings | Percent of GDP | -4.25 | 2.28 | 4.06 | 8.75 | 9.67 | |
| Ireland | Gross domestic product, constant prices | National currency | Billions | 166.79 | 157.69 | 156.49 | 158.73 | 160.21 |
| Ireland | Total investment | Percent of GDP | 21.79 | 14.95 | 11.63 | 10.28 | 10.02 | |
| Ireland | Gross national savings | Percent of GDP | 16.11 | 12.62 | 12.76 | 11.39 | 14.96 | |
| Israel | Gross domestic product, constant prices | National currency | Billions | 699.88 | 707.62 | 742.88 | 777.09 | 801.20 |
| Israel | Total investment | Percent of GDP | 17.90 | 15.44 | 14.73 | 17.65 | 19.21 | |
| Israel | Gross national savings | Percent of GDP | 19.01 | 19.201 | 18.452 | 19.035 | 19.129 | |
| Italy | Gross domestic product, constant prices | National currency | Billions | 1,475.4 | 1,394.3 | 1,418.3 | 1,423.6 | 1,389.9 |
| Italy | Total investment | Percent of GDP | 21.639 | 18.851 | 20.051 | 19.494 | 17.621 | |
| Italy | Gross national savings | Percent of GDP | 18.788 | 16.866 | 16.527 | 16.425 | 17.092 | |
| Japan | Gross domestic product, constant prices | National currency | Billions | 518,230 | 489,588 | 512,364 | 509,450 | 519,621 |
| Japan | Total investment | Percent of GDP | 22.977 | 19.665 | 19.823 | 19.956 | 20.581 | |
| Japan | Gross national savings | Percent of GDP | 26.273 | 22.576 | 23.536 | 21.979 | 21.570 | |
| Korea | Gross domestic product, constant prices | National currency | Billions | 978,498 | 981,625 | 1,043,666 | 1,081,593 | 1,103,467 |
| Korea | Total investment | Percent of GDP | 31.211 | 26.277 | 29.527 | 29.450 | 27.657 | |
| Korea | Gross national savings | Percent of GDP | 31.555 | 30.208 | 32.423 | 31.786 | 31.389 | |
| Luxembourg | Gross domestic product, constant prices | National currency | Billions | 33.607 | 32.238 | 33.170 | 33.719 | 33.757 |
| Luxembourg | Total investment | Percent of GDP | 21.521 | 16.476 | 19.401 | 21.106 | 21.519 | |
| Luxembourg | Gross national savings | Percent of GDP | 26.881 | 23.654 | 27.633 | 28.211 | 27.514 | |
| Netherlands | Gross domestic product, constant prices | National currency | Billions | 561.597 | 541.000 | 549.814 | 555.271 | 550.363 |
| Netherlands | Total investment | Percent of GDP | 20.498 | 18.403 | 17.981 | 18.092 | 17.150 | |
| Netherlands | Gross national savings | Percent of GDP | 24.786 | 23.579 | 25.649 | 27.833 | 25.499 | |
| New Zealand | Gross domestic product, constant prices | National currency | Billions | 139.681 | 137.394 | 139.802 | 141.784 | 145.381 |
| New Zealand | Total investment | Percent of GDP | 22.945 | 18.527 | 19.298 | 18.662 | 19.580 | |
| New Zealand | Gross national savings | Percent of GDP | 14.467 | 16.026 | 16.087 | 14.556 | 14.522 | |
| Norway | Gross domestic product, constant prices | National currency | Billions | 2,572.6 | 2,537.6 | 2,543.5 | 2,577.8 | 2,655.0 |
| Norway | Total investment | Percent of GDP | 24.496 | 22.267 | 23.276 | 24.096 | 25.023 | |
| Norway | Gross national savings | Percent of GDP | 40.445 | 33.990 | 35.192 | 36.876 | 39.223 | |
| Portugal | Gross domestic product, constant prices | National currency | Billions | 164.646 | 159.858 | 162.955 | 160.423 | 155.340 |
| Portugal | Total investment | Percent of GDP | 23.152 | 20.208 | 20.178 | 17.798 | 15.956 | |
| Portugal | Gross national savings | Percent of GDP | 10.552 | 9.415 | 9.826 | 10.572 | 13.839 | |
| Slovak Republic | Gross domestic product, constant prices | National currency | Billions | 62.432 | 59.350 | 61.951 | 63.950 | 65.246 |
| Slovak Republic | Total investment | Percent of GDP | 27.688 | 19.546 | 22.563 | 23.931 | 20.767 | |
| Slovak Republic | Gross national savings | Percent of GDP | 21.410 | 17.073 | 20.051 | 21.465 | 21.915 | |
| Slovenia | Gross domestic product, constant prices | National currency | Billions | 25.958 | 23.923 | 24.220 | 24.365 | 23.796 |
| Slovenia | Total investment | Percent of GDP | 31.792 | 22.149 | 21.067 | 20.128 | 17.049 | |
| Slovenia | Gross national savings | Percent of GDP | 25.630 | 21.457 | 20.480 | 20.133 | 19.331 | |
| Spain | Gross domestic product, constant prices | National currency | Billions | 1,087.787 | 1,047.078 | 1,043.706 | 1,048.057 | 1,033.181 |
| Spain | Total investment | Percent of GDP | 29.114 | 24.004 | 22.812 | 21.541 | 19.636 | |
| Spain | Gross national savings | Percent of GDP | 19.491 | 19.181 | 18.334 | 17.799 | 18.564 | |
| Sweden | Gross domestic product, constant prices | National currency | Billions | 3,335.7 | 3,169.7 | 3,368.2 | 3,495.1 | 3,536.9 |
| Sweden | Total investment | Percent of GDP | 20.205 | 16.471 | 18.736 | 19.613 | 18.539 | |
| Sweden | Gross national savings | Percent of GDP | 29.250 | 23.151 | 25.588 | 26.647 | 25.678 | |
| Switzerland | Gross domestic product, constant prices | National currency | Billions | 527.348 | 517.134 | 532.823 | 543.090 | 548.412 |
| Switzerland | Total investment | Percent of GDP | 22.062 | 19.292 | 19.951 | 20.753 | 20.568 | |
| Switzerland | Gross national savings | Percent of GDP | ||||||
| United Kingdom | Gross domestic product, constant prices | National currency | Billions | 1,459.8 | 1,401.8 | 1,427.0 | 1,440.1 | 1,442.5 |
| United Kingdom | Total investment | Percent of GDP | 17.073 | 14.123 | 15.049 | 14.630 | 14.275 | |
| United Kingdom | Gross national savings | Percent of GDP | 16.073 | 12.857 | 12.507 | 13.282 | 10.771 | |
| United States | Gross domestic product, constant prices | National currency | Billions | 13,161 | 12,757 | 13,062 | 13,299 | 13,593 |
| United States | Total investment | Percent of GDP | 18.086 | 14.715 | 15.469 | 15.489 | 16.160 | |
| United States | Gross national savings | Percent of GDP | 13.352 | 11.134 | 12.212 | 12.189 | 13.131 |
Table 3.0 (b)
| country | country isocode | year | POP |
| Australia | AUS | 2010 | 21515.75 |
| Austria | AUT | 2010 | 8214.16 |
| Belgium | BEL | 2010 | 10423.49 |
| Canada | CAN | 2010 | 33759.74 |
| Czech Republic | CZE | 2010 | 10201.71 |
| Denmark | DNK | 2010 | 5515.57 |
| Estonia | EST | 2010 | 1291.17 |
| Finland | FIN | 2010 | 5255.07 |
| France | FRA | 2010 | 64768.39 |
| Germany | GER | 2010 | 81644.45 |
| Greece | GRC | 2010 | 10749.94 |
| Iceland | ISL | 2010 | 308.91 |
| Ireland | IRL | 2010 | 4622.92 |
| Israel | ISR | 2010 | 7353.98 |
| Italy | ITA | 2010 | 60748.96 |
| Japan | JPN | 2010 | 126804.43 |
| Korea, Republic of | KOR | 2010 | 48636.07 |
| Luxembourg | LUX | 2010 | 497.54 |
| Netherlands | NLD | 2010 | 16783.09 |
| New Zealand | NZL | 2010 | 4252.28 |
| Norway | NOR | 2010 | 4676.31 |
| Portugal | PRT | 2010 | 10735.76 |
| Spain | ESP | 2010 | 46505.96 |
| Sweden | SWE | 2010 | 9074.06 |
| Switzerland | CHE | 2010 | 7623.44 |
| United Kingdom | GBR | 2010 | 62348.45 |
| United States | USA | 2010 | 310232.86 |
Source; https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_retrieve.php
Table 3.0(a) and (b) above does not convincingly provide proof that economic growth correlates with savings and investments as advanced by Keynes general theory. For example Australia with a population of approximately 22 million people as at 2010 had a gross domestic product, constant prices of 1,474 billion( Australian dollars) as at 2012 but the total investment and gross national savings for the same period was 28.84 billion and 25.18 billion in Australian dollars respectively. This represents a 1.9 per cent of total investments to GDP and 1.7 per cent of gross national savings to GDP. Estonia with a population of 1.3 billion as at 2010 had gross domestic product, constant prices of 12.59 billion Euros as at 2012 but the total investment and gross national savings for the same period was 27.63 billion and 26.43 billion in Euros respectively. This represents a 219 per cent of total investments to GDP and 209 per cent of gross national savings to GDP. According to Keynes general theory, Australia should have recorded higher gross national savings and total investments than Estonia because Australia’s GDP is higher than that of Estonia.
Similarly United States of America with a population of approximately 310 million people as at 2010 had a gross domestic product, constant prices of 13,593 billion( US dollars) as at 2012 but the total investment and gross national savings for the same period was 16.16 billion and 13.131 billion in US dollars respectively. This represents a 0.1 per cent of total investments to GDP and 0.09 per cent of gross national savings to GDP. Similarly Slovak republic with a population of approximately 10 million people as at 2010 had a gross domestic product, constant prices of 65.246 billion as at 2012 but the total investment and gross national savings for the same period was 20.767 billion and 21.915 billion respectively. This represents a 32 per cent of total investments to GDP and 34 per cent of gross national savings to GDP. There seems to be a relationship between population level, GDP, gross national savings and total investment. Countries with low populations and high GDPs tend to record higher Total Investments and Gross National savings from the table above.
According to lifecycle theory which states that a country’s savings are influenced by the demographic statistics does also not seem to hold in this case. A country like United States of America with a population of about 310 million as at 2010 should record higher gross national savings than Korea with a population of about 48 million. But USA gross national savings as at 2008,2009,2010,2011 and 2012 was 13 billion, 11 billion, 12 billion, 12 billion, and 13 billion respectively whereas Korea gross national savings was 31 billion, 30 billion,32 billion, 31 billion, and 31 billion respectively.
There is however proof that savings seem to move from one country to another based on attractiveness of investment opportunities in the recipient country. According to JOSIC and JOSIC (2012) there are other factors that influence mobility of capital such as size of the country, foreign currency exchange rate regimes, financial sector characteristics and structure etc. A country like Estonia had a GDP of 13 billion, 11 billion, 11billion, 12 billion and 12 billion in 2008, 2009, 2010, 2011 and 2012 respectively and gross national savings respectively of 29 billion, 18 billion, 20 billion, 24 billion and 27 billion. Total investments was 21 billion, 22 billion, 23 billion, 27 billion and 26 billion in 2008, 2009, 2010, 2011 and 2012 respectively. This clearly showed that most of the savings recorded was from foreign sources and investments were also funded by foreign savings and only a small portion from domestic savings which is in line with Feldstein Horioka theory. There is proof that savings determine investments and thus growth rates in an economy.
4.0 Conclusions
From the foregoing there exists a strong correlation between saving, investment and rates of growth in an economy. National saving is an aggregate of household, business and government saving. Household and business saving constitutes private saving. For an economy to achieve high growth rates it should as a minimum save at least 25 percent of its gross domestic product. Public investment in social amenities such as roads, bridges, waterways, ports, energy etc. is very important since it is a catalyst to private investment to acquire productive assets. There is a strong correlation between national saving and investments and growth rates. The higher the levels of investments and savings the higher the level of growth rates that an economy can achieve. Investments and savings are directly proportional in that without investments there can be no savings and without savings there can be no investments. According to Feldstein Horioka theory, the correlation between domestic savings and domestic investments is higher in cases of low capital mobility. Otherwise capital flows from rich nations will move to nations that offer attractive investment opportunities thereby reducing the correlation.
5.0 Recommendations
It is important for countries to enhance national saving by offering incentives to encourage households and businesses to save. The level of saving affects investment levels and growth rates in a country therefore developing countries should increase national saving to increase investments to create jobs and alleviate poverty. Strategies that governments can use to enhance savings is by creating expanded savings avenues, raising saving contribution upper limits, providing tax-free earnings, abolishing earnings limits and making it simple for citizens to choose which saving scheme or vehicle to use. Nations could also develop incentives to create lucrative investment opportunities to encourage capital flows from developed rich nations with excess savings looking for lucrative investment opportunities. According to Feldstein Horioka theory savings flow from countries with surplus to countries with deficit savings but which offer attractive investment opportunities.
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