Wednesday, July 17, 2024

National savings as a catalyst for economic growth

Experts in field of economics are generally agreed that the accumulation of fixed capital can only possible through sufficient savings. Developing countries are always constrained by inadequate savings and investment, for instance, economic development in Sub-Saharan Africa has been constrained by inadequate savings and investment, and this being the reason that Africa is still known as the “world’s poorest continent”.

A research study conducted by authored Bhanya Jagadeesh titled: “The Impact of Savings in Economic Growth: An Empirical Study Based on Botswana” concluded that “the globalist ideology presented the world and, above all, the poor countries, a bright future. This promise for better became true in the case of the great powers and of the economic decision-makers, while the second – and third-world states were left with hope…priorities of economic policy, should be re-analyzed and redefined, as an aspect that is underlined as a solution of recovery and of economic and social progress”.

According to the research paper, savings creates capital formation and it further leads to technical innovation and progress which helps with the economies of large-scale production and increases specialization, which helps to accelerate the productivity of labour, it further resulting in increased gross domestic product (GDP).

“Thus savings leads to fuller utilization of available scarce resources in an efficient way, increase in the size of national output, income and employment, thereby solving the problems of inflation, unemployment and balance of payment, poverty, inequality; and making the economy free from the burden of foreign debt and leads to state of better welfare”, states the paper adding that “the vicious circle of poverty in developing countries can also be broken through sufficient savings, and it is the main key to economic development as well”.

Additionally, it is notable that the slow rate of development in third world countries are usually attributed to the low levels of national savings, that constraint their capacity to invest in capital formation. This leads to lower-level economic growth and development than other countries that contribute enough savings. So, saving is usually considered as the main source of economic growth.

The study acknowledges that despite its excellent economic performance, Botswana faces a number of serious challenges of high rates of unemployment and high levels of poverty. 30.3 percent of the population in 2003 were found to be living below the poverty datum line. Unemployment was estimated at 17.7 percent in 2010 and it was only 15.5 percent in 2006 and it is closely connected to poverty.

Inflation in 2012 is slightly higher than 2010. According to the database with the World Bank it was 6.94 percent in 2010, and 7.6 percent in 2012. In addition to these major challenges, economic growth has also gradually trended downwards and the capital formation rate has dropped from 28 percent in 1998 to 18 percent in 2005, well below the vision target of 40 percent per Second Common Country Assessment for Botswana Final Report of 2007.

“For sustainable development, Botswana has to diversify its growth opportunities and need to have huge investment to exploit the growth opportunities. Since it is a land locked country, for its trade it heavily depends on neighbouring countries and road transport. So investment for better infrastructure facilities and communication system is really important. In this situation huge and intensive effort is needed to accelerate investment in Botswana. Significant portion of that can be financed from domestic savings.

According to the study findings, the overall measure of capital formation and savings act as a major booster of output growth in Botswana, a one percent increase in the variables accelerate GDP by 0.42 percent and 0.14 percent respectively. The result also got a positive relationship between economic growth and exports. This goes to confirm that exports are an injection of income into the economy, and it is at its most significant level at one percent. Lastly, the results also find evidence that the inflation rate has a positive impact on economic growth.

The research study suggests that policymakers should focus on increasing the level of domestic private savings because the crucial problem for developing countries are the lack of investments which restricts economic growth, and it will also serve to the problem of unemployment and poverty.

The empirical result also shows that saving is the channel through which capital formation is transmitted to accelerate the economic growth in Botswana. The first policy implication of the study is that, efforts have to be made to raise the savings in a sustainable manner and should take appropriate strategy to divert savings in to the productive investment. The second policy suggestion is that government should take appropriate measures to encourage exports.

The study, motivated by poverty rate, inequality, unemployment rate, large decline in economic growth in Botswana used data from 1980 to 2013 to find the relationship between gross domestic savings and economic growth in Botswana.

Another research study titled: “Banking Sector Development and Foreign Direct Investment: A Case of Botswana”, using time series data from 1980 to 2012 from World Bank Development Indicators database found that there is a “positive feedback effect between banking sector development and foreign direct investment (FDI) inflows” whilst yet another perspective maintains that “there is no direct causality relationship between banking sector development and FDI net inflows”.

The results of the study confirmed that “the long run relationship between banking sector development and FDI net inflows is an indirect one and the two set of variables affect each other indirectly through other factors in Botswana”.

It is reckoned in the study that in the case of Botswana which is characterized by a relatively small size of the banking sector and which heavily relies on FDI for economic prosperity, the directional causality between FDIO inflows and baking sector development requires a thorough scrutiny.

The findings of the study were intended to help Botswana authorities to formulate FDI plans and strategies that ensure the benefits cascades down to the banking sector which is the repository for domestic savings in the national economy.

Domestic credit (which is financed primarily from held deposits) to private sector by banks (percentage of GDP) is the proxy for banking sector development whilst FDI net inflows (percentage of GDP) stand in for FDI inflows measure.

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