Private savings, growth, dependency ratio and foreign capital: some issues and lessons from Malaysia

This paper presents an empirical assessment of the determinants of private savings rate in Malaysia by focusing on the role of foreign savings and economic growth. The analysis, based on 40 years of observations, reveals that in the long-run per-capita income, dependency ratio, foreign savings (FDI), interest rate and taxes all have a significant effect on private savings rate. Causal inferences based on Toda and Yamamoto (1995) approach reveal that savings Granger cause economic growth and not vice-versa. In addition, we endorse the long-run causal relationship that runs from FDI to economic growth. We conclude that much of the recent slackness in short-run private savings is a consequence of the economic slow-down due to the Asian financial crisis and that, as the economic performance in Malaysia improves, both domestic and foreign savings are expected to increase.