Now, that may well be history. So, let us take a fresh look at the much promoted savings-investment model when a fresh push towards economic growth is under way on its basis. Whether this economic growth will translate into economic development cannot be viewed as beside the point as the two might be reinforcing each other. For, it may not be all too very well to say growth now and development to follow as growth may not follow sustainability unless coupled with development now too.
As far as investment is concerned, the investment climate has to be conducive and attractive to begin with. That is not the case yet, some temporal increments here and there notwithstanding. Due to our inability to deal with the sources and causes of terror, we remain a high-risk country even if we have done a good job at keeping the symptoms contained. We have yet to get at the roots that encourage proliferation of terrorist sentiment from our part of the world. Until then, realisation of big investment targets will remain elusive.
As for savings, these are not a function of per capita income alone. Per capita income does not measure the state of economic health of all the people. Rather, it conceals the state of economic health of various segments by giving an average. Income distribution may be highly skewed in favour of those receiving a disproportionately high share and whose share in total population cannot be determined from per capita income. So, per capita income is to be read with income distribution and poverty scores. Unless these are known and factored into calculations, savings potential cannot be determined.
It is usually assumed that people with high incomes have a high propensity to save. This may not be true for all places as it is also a function of cultural values. In our country, the rich have a high propensity to consume and to consume conspicuously. When they do so, lower income groups want to catch up with them and then they also tend to consume conspicuously especially on occasions. This cultural tendency, therefore, adversely affects propensity to save
So, a per capita income that may be high because of a very high disproportionate share of upper income groups, may not necessarily help savings much due to the above tendency. It will, therefore, not be wise to keep diverting a higher share of national income to the rich in the hope that they will invest and benefits will trickle down. They might engage either in conspicuous consumption and/or save abroad and not invest domestically due to a risky home environment. So, the relationship between high per capita income, saving, and investment may be a flimsy one, if at all, given the peculiarities of our home ground.
To dig deeper to know why our savings potential is low, it must be appreciated that total national savings are composed of individual personal savings, business savings, and government savings. With concentration of incomes at the upper end, can personal savings be high? In Pakistan, the top 20 per cent of the population gets 40.3 per cent of total income and bottom 20 per cent gets only 9.3 per cent (World Development Indicators, 2006). Pakistan’s bottom 40 per cent gets only 22.3 per cent and another 20 per cent gets 16.3 per cent (World Development Indicators, 2006). That is, bottom 60 per cent gets 38.6 per cent and the top 40 per cent gets 61.4 per cent.
With majority of country’s population getting a disproportionately low share of national income, their ability to save will be low and so will be their contribution to national savings. The top 40 per cent getting a disproportionately high share of national income either do not save commensurately due to the cultural factors discussed above or they save abroad due to difficult domestic environmental factors. In either case, their saving habit is not likely to impact the magnitude of domestic investment. However, it does impact the magnitude of national savings in a manner that is not favourable. Amongst other factors, these are some reasons why individual personal savings are low.
Other reasons why personal savings are low include the low return on savings, availability of credit schemes that impel to consume more than to save, and a certain social security culturally available due to large families. However, even if these variables are addressed, personal savings are not likely to increase a whole lot unless the structural sources discussed in the previous part of this article are addressed.
Next is business savings. Business savings will be high only if businesses are managed professionally and results declared honestly. If good results are concealed, business savings are likely to remain low.
Government savings are low for as long as tax payment and collection remain weak and expenditures not managed judiciously. According to an estimate by Paul Streeten, tax evasion in Pakistan is about five per cent of GDP which if remedied will wipe off the fiscal deficit.
So, additional contributors to low savings are lack of business ethics and government ineffectiveness.
We, therefore, see that the variables that are feeding into low savings cut across economic, social, cultural, political, ethical, and administrative factors. This is no different from the conclusions drawn by earlier development economists regarding the failure of the savings-investment model in Third World countries. According to earlier analyses, the underlying problems are not just economic revolving around per capita income and the like. Rather, the problems are attitudinal, institutional, and structural. This is as true today as is documented in economic history.
It further goes to show that if savings are to be enhanced, income distribution is to be made equitable and poverty is to be alleviated. People must first have earning power sufficient enough for them to satisfy their basic needs and then become high savers. This means that a parallel assault on issues of equity is required and not one sequenced after growth to say grow now and distribute later. Unless equitable distribution of national income goes hand in hand with growth, growth will not be sustainable.
The savings-investment / Harrod-Domar growth model’s emphasis was that the savings gap may be plugged through foreign funds’ inflow that did flow in but to little avail. For, the economy must develop capacity to service the debt and to grow out from being a debtor nation to a creditor nation. This is possible only if a capacity is developed to generate domestic savings that in turn needs emphasis on equity and distribution with growth. If this requires structural changes, so be it.
But, that in turn requires a strong state to do what is imperative in the interest of sustainable growth and development on all fronts economic, political, social, cultural, and administrative alike. What is passed on as a savings-investment model is in fact an eclectic model but whose other crucial facets get ignored when the model only highlights savings and investment upfront!