Academic journal article The Journal of Developing Areas

An Autoregressive Distributed Lag (Ardl) Analysis of the Nexus between Savings and Investment in the Three Asian Economies

Academic journal article The Journal of Developing Areas

An Autoregressive Distributed Lag (Ardl) Analysis of the Nexus between Savings and Investment in the Three Asian Economies

Article excerpt

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The correlation between saving and investment remains controversial despite the answer being theoretically straight forward. High level of saving logically opens wider door for investments as it pours in greater availability of capital. However, it is sometimes empirically proven wrong.

Saving in economy is defined as an action of putting aside some of the current incomes for the future instead of spending it for current consumption. At national level, saving means resources available to sustain and expand the nation's capital stock. It is a sum of savings by households, businesses or firms, and all kinds of savings at all levels of governments of which include federal government, state and local governments.

Investment on the other hand involves a process of purchasing assets or items with intention to receive a return in the future. In economic perspective, investment means the activity of purchasing goods that are consumable to create future wealth. However, many are comfortable to define investment as the activity of purchasing investment assets such as equities, bonds and unit trusts with the idea that these assets will produce an intended income, both from capital appreciation and dividends in the future.

Feldstein and Horioka (1980) concluded that domestic savings and investments were highly correlated in 16 countries under Organization for Economic Development (OECD), over the period of 1960-1974. Many researchers relate this issue with the capital immobility. In a closed economy, savings become a crucial factor to determine the level of investments. Domestic savings both in the banking and non-banking system are equally important to finance domestic investments. However, do all closed-economy countries' saving and investments have high correlation? Is it possible for them to cointegrate? James B. Ang (2007) had arrived at a conclusion that there was a robust long-run relationship between domestic saving and investment in Malaysia. He found that there was a robust long-run cointegration between domestic saving and investment of which suggested that any change in domestic economy will be closely associated with a change in investment.

In the case of Malaysia, its domestic saving's rate against GDP had increased tremendously from 20% in 1970 to a historical high of 48% in 1998, before it was impacted by the Asian Financial crisis. The total deposits in the banking system grew by 400% from RM368.2 billion in 1997 to RM1, 526 billion in 2013 despite the country's economy being thwarted by several economic shocks such as the Asian Financial Crisis 1998 and the US mortgage subprime mortgage crisis 2008/2009. Saving in the non-banking system such as pension funds had also improved. As an example, the Employee Provident Fund's (EPF) fund grew by 283 fold from RM2.1 billion in 1970 to RM593.5 billion in 2013.

Due to the surge of domestic savings, the government of Malaysia had shifted its policy from obtaining loans from foreign countries to domestic borrowing as a main source for investments. As a result, Malaysia's domestic debt surged from only RM4.3 billion in 1970 to RM484.8 billion in 2012. Hence, without taking into account the foreign direct investment and portfolio investments, domestic savings and investments in Malaysia seem to be correlated.

While China is forecasted to take over the United States (US) as the world's number one economy, India's economy is foreseen to jump ahead of Japan. However, how India's saving and investment can play an important role to foster its economic development? Reetu Verma (2007) in her research evidenced that India's economic growth had spurred savings. The savings then drive further investments both in the short-run and long-run. The empirical results obtained in her paper demonstrate that savings and investment are derivative(s) rather than initiating factors for economic growth. …

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