Correlation Between Savings and Investments and Their Impact on Gdp in China, India and Pakistan

3753 Words Mar 29th, 2010 16 Pages
The saving rate of any country is an important indicator of economic development since the domestic saving rate is directly related with the investment rate and the lending capacity of the banking system. Saving and investment are two key macro variables with micro foundations, which play a significant role in economic growth. Global emerging economies are experiencing record savings at a time when the developed world has been witnessing a decline in gross domestic saving rates, having a positive impact on the investment

climate in these countries. Higher savings and investment rates eventually help in boosting GDP. This is another reason why GDP is growing faster in the emerging world than in the developed world.

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For achieving a set growth rate in the real GDP and to match the per annum growth envisaged in investment, it is required that a saving rate be achieved that is broadly in line with the investment requirements.
However the problem confronted by developing countries is that the saving ratios remain low. Low saving ratios result in low investment levels. At the same time, due to low income the taxable capacity remains lower, i.e. government earnings also remain low. In such situations, the country has to face saving investment deficit as well as the deficit in balance of payments (BOP) [Mohey-ud-din, Ghulam (2006)]. As a result most developing countries have to rely on Foreign Capital Inflows (FCI) to generate sufficient saving in order to achieve high levels of growth.
According to Kumarasinghe P J, (2007), saving provides the wherewithal for capital formation, which in turn, is essential for economic development. If a country has a low rate of saving over a long period of time, the country’s economy would be entrapped in a vicious circle of low investment, low growth, low productivity and low real per capita income. Thus, every country would like to have a higher rate of domestic saving.

This study includes panel data on investment and savings for three South Asian developing countries namely Pakistan, India, and China over the period of 2000-08 compiled

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