An Empirical Investigation of Saving Behaviour in Pakistan

• Author: NABILA ASGHAR AND MUHAMMAD NADEEM

Abstract

The main objective of this study is to examine short-run and long-run causal relationship between national savings and its selected determinants in Pakistan for the period 1984-2014. Using Johansen cointegration and Vector Error Correction Model (VECM), the results of the study indicate that foreign remittances, economic stability and population have positive impact on savings while government stability and income inequality have negative impact on savings.

The short-run estimates show that there is convergence in the national savings equation which has speed of adjustment 47 percent in one period. Using Toda- Yamamoto Causality test the study indicates that there is bidirectional causality between income inequality and foreign remittances, income inequality and population size, government stability and population size, savings and income inequality. There is unidirectional causality between the variables included in the model: savings and economic stability, savings and population, savings and government stability, population size and economic stability, government stability and foreign remittances, foreign remittances and savings except between economic stability and foreign remittances, and between economic stability and income inequality.

Keywords: National savings, Gini coefficient, Remittances, Economic stability

1. INTRODUCTION

   Savings play an important role in attaining and maintaining higher levels of economic growth. The significance of savings in economic growth has been highlighted in various theories of economic growth. Harrod-Domar model of economic growth emphasizes the crucial role of savings in economic growth. The neoclassical growth model by Solow (1956) discusses the role of savings in determining the higher growth rates of per capita income and capital per capita. Later on endogenous growth theories also discuss the role of savings. Romer (1986) explains that economic growth depends upon technological changes, human capital and aggregate saving and if less developed countries have desire for achieving high economic growth rates they must save and invest higher fraction of Gross Domestic Product (GDP).

   A number of empirical studies are available in the literature which are consistent with these theories. Comparative analysis of savings have revealed that most of the emerging economies like China, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand have high saving rates. Similarly many sub-Saharan African and some of the Latin American countries save less and as a result these countries have experienced low levels of economic growth. This indicates that the exploration of the determinants of savings in an economy is highly important for policy makers to formulate and implement relevant policies for increasing savings and economic growth.

   Since independence low saving rate has been observed in Pakistan among South Asian countries which has resulted in low economic growth rate over time. This low saving rate reflects the consumption preference of economic agents. Pakistani culture is considered to be the most pompous and people are highly extravagant. Beside that policy makers have failed to formulate effective policies to provide incentives for savings so that it motivates individuals to change their consumption behaviour. Due to lack of education people prefer to spend money on useless customs and traditions. Furthermore, economic conditions prevailing in Pakistan economy bring up the need to focus on raising the domestic savings, and not to rely on foreign savings and loans to sustain its economic growth by augmenting investment in physical and human capital (for details see World Bank Report 2006).

   The average saving rate of Pakistan in the decades of 1970s and 1980s was quite premature. To cope with this devastating situation of savings in the economy, Structural Adjustment Programme (SAP) was launched in 1989- 90. According to SAP, the government was forced to abstain bank borrowing to finance the consistent budget deficits. Government then redefined National Saving Scheme (NSS) and set high returns on all certificates and bonds of NSS. Interest rate was set at 18 percent or more, many other incentives were also announced for savers in the form of tax exemptions. After the implementation of SAP 1989-90 there was a notable increase in the savings rate in the early 1990s.

   Unfortunately saving rate in Pakistan remained much low as compared to other regional countries. Saving rate in India has been observed higher than Pakistan although both countries face similar socio-economic conditions. Table 1 shows the comparative analysis of gross domestic saving (five year average) with neighbouring countries, South Asia and overall World. The average saving rates over the time of comparison (1976 to 2013) in Pakistan has been 21.46 percent of GDP and in case of India it is 24.35 percent of GDP which is higher than Pakistan. The average saving rate in Bangladesh is 21.81 of GDP which is also higher than Pakistan.

   The average saving rate in overall South Asia is 23.69 percent of GDP which is higher than Pakistan. Furthermore, the average saving rate of the world during this period has been observed at 22.19 percent of GDP which is also higher than Pakistan. This indicates that savings rate in Pakistan remained low which brings up the need to focus for raising the investment level for achieving impressive economic growth rate in the region.

   TABLE 1 Comparative Analysis of Gross Domestic Saving (% of GDP)

   Country 1976-80 1981-85 1986-90 1991-95 1996-2000 2001-05 2006-10 2011-13 Average

   Pakistan 21.7712 26.4647 22.4726 22.9795 19.2798 25.8528 20.3321 12.5640 21.4646

   India 19.4596 20.7006 22.3759 23.5566 24.7519 29.5859 34.6984 19.7381 24.3584

   Bangladesh 5.4852 15.9923 16.8417 21.1933 24.4531 29.8996 37.3295 23.3644 21.8199

   Nepal 16.7916 16.4876 14.1503 15.6901 20.3659 25.4140 34.4555 24.5957 20.9938

   Sri Lanka 10.9112 21.3802 19.4634 20.8125 21.8712 21.8873 22.7373 14.3859 19.1811

   South Asia 18.5989 21.0071 21.9019 23.2226 24.0537 28.9787 32.8743 18.9245 23.6952

   World 24.3289 23.3308 23.6898 22.5883 23.6844 23.1246 23.2468 13.5543 22.1935

   Several empirical studies are available in the literature on the causal long-run and short-run relationship between the variables which affect the saving behaviour of people in Pakistan but most of these studies suffer from defects due to short span of data, poor estimation techniques and the selection of irrelevant variables in the model. In this situation, it is difficult to point out the exact factors responsible for low saving rate in Pakistan. This study is an attempt to bridge the research gap by analyzing the long-run and short-run causal relationship of saving behaviour in Pakistan.

   This study is of great importance as it analyzes the relationship between the variables using the latest econometric techniques, appropriate selection of time span and the use of relevant variables in the estimation of the model. The results of the study may be helpful to the researchers and policy makers in designing policies needed for removing the bottlenecks in the way of increasing the saving rate in Pakistan.

   The rest of the paper is organized as follows. Section II reviews the empirical literature on the behaviour and determinants of saving. Section III presents data and model specification, section IV contains econometric methodology and section V provides the empirical results and interpretation. The final section concludes.

2. REVIEW OF LITERATURE

   A number of studies have analyzed the behaviour of savings in different countries of the world. Some studies are based on time series analysis of macroeconomic variables while other studies use cross section micro dataset for analysis purpose. The present study is an attempt to analyze the relationship between national saving and its determinants using time series dataset which is more consistent with the objectives of the study.

   Several studies are available in the literature which have thrown light on the relationship between national savings and its determinants in developing and developed countries of the world (for details see Pradhan and Upadhayaya, 2001; Dirschmid and Glatzer, 2004; Narayan and Siyabi, 2005; Thomas, 2006; Nwachukwu and Egwaikhide, 2007; Cohen-Cory et al., 2010; Mualley, 2011; Igbatayo and Agbada, 2012; Aktas et al., 2010; Larbi, 2013). For this purpose various econometric techniques were utilized. A number of studies have analyzed the saving behaviour in Pakistan.

   Khan et al...