Savings in Malaysia and its impact on economic growth

Abstract

Similar to other growth determinants such as monetary aggregates, interest rates, investment, etc., the savings-growth relationship suffers from unclear causality direction. The direction of causation between savings and growth has been widely discussed in the literature of development economics. Clear direction of causation between savings and growth is crucial since it has "some implications on policy formulation. The direction of causality from savings to growth inclusive of indirect causality, that is through investment implies that macro and micro policies should emphasise on savings enhancement to achieve high growth. On the contrary, growth to savings causality implies that policy-makers should focus on other factors such as infrastructure, human resource, technology, etc. which influence growth. The aims of this paper is to make a descriptive as well as econometric analysis on the direction of savings-growth relationship for the Malaysian economy. This study is important since the direction of savings-growth causality tends to change over time. Economic globalisation increases capital mobility across countries and induces the outflow of domestic savings for overseas financing. This in turn, causes more instability in the savings-growth causality. Therefore, frequent review in the savings-growth relationship is needed to come up with the right policy action.