Saving-Investment Nexus in Developing Countries: Does Financial Development Matter?

By Adeniyi, Oluwatosin; Egwaikhide, Festus O. | Journal of Economic Development, June 2013 | Go to article overview

Saving-Investment Nexus in Developing Countries: Does Financial Development Matter?


Adeniyi, Oluwatosin, Egwaikhide, Festus O., Journal of Economic Development


The Feldstein-Horioka puzzle is re-examined using a sample of 20 sub-Saharan Africa (SSA) countries. Unlike the extant literature we demonstrate the expediency of sustenance of financial sector reforms for the saving-investment nexus in SSA. Findings showed saving retention coefficients similar in magnitude to those already reported for developing countries, particularly SSA. In addition, however, the results uncovered a telling intervening role for financial deepening in the saving-investment space. Going forward, the precise nature and corresponding policy implications of this role should form an integral part of discussions in both academic and policy circles.

Keywords: Feldstein-Horioka Coefficient, Panel Mean Reversion, Fixed Effects, Sub Saharan Africa

JEL classification: C23, F21, F36, K11

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

A distinguishing feature of Africa's twenty first century epoch, especially in the wake of the recent global economic cum financial crisis, appears to be the declining trends in traditional sources of investments, especially Official Development Assistance (ODA), foreign direct investment (FDI) as well as remittances, emanating from the developed countries. This evolving investment regime could potentially persist as a result of a number of factors chief among which are binding budget constraints, macroeconomic imbalances and challenges in terms of reaching parliamentary consensus in these African investment supply hubs. The current global economic outlook thus situates Africa in a position of grappling with declining trade flows, a collapse of commodity prices, reduced access to international private financing, falling government revenues, reductions in remittances, and, to some degree, uncertainty about future commitments of official development assistance (Heintz and Ndikumana, 2010). There is no gainsaying the stymieing effects these turn of events could have on the growth trajectories of African economies.

The foregoing, both from policy and strategic perspectives, should prod the minds of policymakers within the African continent on intensifying efforts towards better domestic resource mobilization. This should be with a view to ensuring that the investment resources needed for growth can be partly offset from within, particularly amid unfavorable external conditions. Received economic wisdom offers a clear, arguable though, association between saving and investment on one hand and the growth promoting influence of investment on the other. Theoretically, in the absence of capital mobility, domestic investment financing should be largely saving-based, implying between these variables, a correlation metric in the neighbourhood of unity. Thus, under perfect capital mobility, savings should flow to the most attractive investment projects globally. The puzzle, however, was that Feldstein and Horioka (1980), FH hereafter, using data on 16 of the Organisation for Economic Cooperation and Development (OECD) countries over the 1960-1974 period reported the existence of rigidities and preferences which tend to keep saving locked in investments within the country of origin. This was clearly at variance with the intuition of near perfect capital mobility expected among the OECD economies, particularly in such an era characterized by ample push for global capital markets integration.

Also, in a parallel but relatively older literature, McKinnon (1973) and Shaw (1973) working independently identified a key role for financial intermediaries in matching funds from surplus to deficit units in the economy during the growth process. Thus, well functioning financial markets ought to minimize the divergence between domestic saving and available investment opportunities. Therefore, the higher the extent of financial sector advancement, the higher is the level of investment that can be financed via an efficient allocation of saving (Bencivega and Smith, 1991; Guiso et al. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Saving-Investment Nexus in Developing Countries: Does Financial Development Matter?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.