Part Three PART THREE Saving, Investment, and Capital Flows

Announcements October 16-Thursday: No Class – Traveling to Sweden & Africa/Ethiopia to attend conferences Will return October 26 Sunday late Afternoon October 30, Thursday,Test #3 (Chapters 10,11,12,13 ) Tuesday & Thursday -October 21 & 23 classes will be covered by Dr. Happy Siphambe. He will cover chapters 11, 12, & may be 13? Midterm grades are posted. Check them. If you have questions contact me by at:

Chapter 10 Saving and Resource Mobilization Norton Media Library Dwight H. Perkins Steven Radelet David L. Lindauer

Chapter 10: 0utline Saving and Investment around the World A Saving Taxonomy Household Saving and Consumption –The Keynesian Absolute-Income Hypothesis –The Relative-Income Hypothesis –The Permanent-Income Hypothesis –The Life-Cycle Hypothesis –Growth and Saving: Which Causes Which? –Other Determinants of Private Saving Corporate Saving Government Saving Foreign Saving

Learning Objectives-Chapter 10 The record of saving and investment in developing countries. The relationship among tax revenues, public sector expenditure, and government saving. The observed patterns of household saving behavior and the theories of household saving. The importance of foreign private saving. The relationship between growth and savings The different impacts of corporate saving, government saving, and foreign saving

Capital Fundamentalism The development strategy of the 1950s & 60s was “Capital Fundamentalism” Related to theories of Economic Growth such as Harrod-Domar Model, Lewis Model Data for Savings, Investment for countries table 10.1 Patterns of Savings Around the world

Fig. 10.1: Income and Saving

Fig. 10.2: Gross domestic saving(%GDP

Table 10.2: Country Saving data

Key Component of Saving Interrelationship of key components of savings Total saving= Domestic + Foreign Saving Domestic =Government + Private saving Foreign Saving= Official + Private Private = Household + Corporate Official = Grants + Loans Private= Debt + equity See Figure 10.3

Fig. 10.3: Key components of savings

Household Saving and Consumption Two main reasons of savings by households: 1.To Generate future income 2. To Protect against unexpected fall in income. “Precautionary motive”

Theories of Household Saving Behavior Theories that explain 3 observed patterns 1. within a particular country at a given time 2. Within particular country over time 3. Across countries savings vary with no clear relationship to income

4 Alternative theories of Saving behavior 1. Keynesian Absolute-Income Hypothesis Household saving= f( disposable income) C= c* + (1-s) Yd :where C= private consumption, s= marginal propensity to save, and Yd= disposable income If s=0.15, c*=autonomous consumption If S=Yd then S= -c+sYd

Fig. 10.4: Keynesian Absolute Consumption Hypothesis

Keynesian Absolute Income Hypothesis This idea is shown by Figure 10.4 To the left of A, consumption exceeds disposable income and saving is negative To the right of point A, Saving is positive

Fig. 10.5: Consumption and Savings in the Short-run and Long-run

Consumption & Saving in the Short run and long term with rising income over time Figure 10.5 shows the following 45 degree line shows all points where consumption + saving = Income 4 Short run functions for each year 1990, 2000, 2010, and 2020 are show what people would have spent at various levels in those years The flatness of the these curves shows consumes do not change consumption habits in the short-run In the long consumption path is more less flatter or more steper.

The Relative Income Hyothesis – Dusenberry hypothesis The Dusenbery hypothesis is a form of relative income hypothesis based on the idea consumption and saving depend not only on current income but also on previous level of income. Cd1= (c +bCh) + (1-s) Yd1 Cd1, Yd1= consumption & income in period 1 Ch is previous high consumption level b= is constant regardless of income. The basic idea is that consumption in the current economy tends to rachet upward overtime as income grows. The relationships between Absolute income hypothesis and that of Relative hypothesis is shown in figure 10.4

Fig. 10.6: Age Dependency Ratio

Dependency Ratio Dependency Ratio from young population 15 yeas or less What is the Impact of dependency ratio on Savings & Investment? Dependency Ration from Older (retired) non- working Population over 65 Where does the main dependency ratio come from for ICs and LIC’s? for Africa?

Fig. 10.7: Government Revenue, Consumption, Saving

Table 10.3: Capital Flows to Developing Countries

Table 10.4: Capital flows in LDC by income level

End Chapter 10 This concludes the Norton Media Library Slide Set for Chapter 10 W. W. Norton & Company Independent and Employee-Owned Economics of Development SIXTH EDITION By Dwight H. Perkins Steven Radelet David L. Lindauer