THE savings rate (marginal or average) is regarded as a key performance indicator by development economists, and foreign aid practitioners admonish their clients to increase their savings ratio as a primary condition for achieving a satisfactory rate of economic growth. However, not only have questions been raised regarding the significance of the savings effort as an independent determinant of economic progress, but the formulation of policies designed to increase the savings propensity has suffered from a dearth of knowledge regarding the nature of the savings function in developing countries. A number of alternative savings hypotheses (derived mainly from the literature relating to developed economies) have been advanced, but the paucity of reliable data has made it difficult to test these hypotheses and obtain results which warrant a reasonable degree of confidence. The purpose of this article is: a) to review the theoretical and empirical literature on the savings function in developing countries; b) to assess critically the findings with respect to the major hypotheses; and c) to summarize the state of our knowledge on this important topic. We shall begin with a brief review of the nature of the data on savings in developing countries with which economic analysts must work.

https://www.jstor.org/stable/pdfplus/2721217.pdf

The Nature of the Savings Function in Developing Countries: A Survey of the Theoretical and Empirical Literature

This article surveys recent attempts to measure and analyze household savings behaviour in developing economies. Studies of the relationships between savings and current income, permanent income, wealth, interest rates, the price level, household demographic characteristics, occupation, income distribution, direct taxation, and other factors are reviewed and evaluated.

Econometric studies of household saving behaviour in developing countries: A survey

The paper tests some household savings hypotheses with time-series data for Pakistan over the 1950-51-1976-77 period. The permanent income model is found to give a much better explanation of the year-to-year variations in household saving than does the simple current income model. Among other findings is a highly significant correlation between changes in the real rate of return on financial assets and household saving.

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Household Saving in Pakistan: Some Findings from Time-Series Data

Savings is a strategic variable in the theory of economic growth. One of the major goals of economic policy is to encourage savings. There are a number of factors, e.g., tax rates, interest rates, wage rates, prices, etc., that affect savings differently. In economies where the bulk of savings are generated in the personal sector, economic policy becomes quite complicated, insofar as it has to ensure that the total impact of various policies encourages and directs savings into desired channels. One of the important factors whose effects on savings a policy-maker needs to know is prices. This information is particularly necessary in the case of developing economies and for economies that experience inflation and fluctuations in the exchange value of their currency, these later phenomena being interrelated. However, the influence of prices on savings is unknown. Economic theory does not provide even a qualitative answer. To exemplify the point, let us consider a few illustrative arguments. For instance, higher prices lower the value of assets and thereby discourage consumption, which is another way of saying that savings are encouraged. Similarly, higher prices increase the demand for nominal cash balances needed for transaction

The Effect of Prices on Savings

In my original article, \"The Effect of Prices on Savings,\" II argued that qualitative economics does not offer any a priori expectation of the effect of prices on savings. Accordingly, I suggested the help of quantitative analysis and employed a theoretical formulation that savings may be affected both by income and prices. To test this idea quantitatively, I formulated two alternative hypotheses. I derived quantitative magnitudes from the use of time series data for India. My conclusion was that the effect of prices is negative. The basis of this conclusion was: (i) the magnitudes of the marginal propensity to save, derived from both the alternative hypotheses, agreed with other studies by researchers using different formulations, namely, around 0.19; and (ii) that both formulations yielded, more or less, the same magnitudes, namely, the effect of price level as

Romesh K. Diwan

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The Effect of Prices on Savings

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