Domestic Saving and Capital Inflow in Some Asian Countries: A Time-Series Study

Abstract

EVEN IN THE earlier development literature, while many economists formulated their theories mainly in terms of a closed economy, some gave primary emphasis to external factors. The latter made foreign trade and capital inflow the principal determinants in the development process, though none of these economists presented any formal models linking the foreign trade sector to the growth of income. The role of foreign capital in the development process was generally regarded as supplementing domestic investment, thus making possible an increase in domestic investment over domestic saving. Gradually, researchers recognized that capital inflow is associated with the problems of debt servicing and loss of independence to the capital-export countries. However, for a long time economists did not focus their attention on the relationship between capital inflow and domestic saving but rather concentrated on the role of capital inflow in supplementing domestic investment. It was Haavelmo who first raised the question of the possible adverse effect of capital inflow on the level of domestic saving.' The gain from capital inflow may be small or even negative, and hence it is necessary to reconsider the asserted favorable effect of capital inflow on the growth of income. In view of the practical importance of the Haavelmo hypothesis, numerous empirical studies have been conducted to test its validity. Rahman obtained a statistically significant negative relationship between the saving ratio and the capital inflow ratio (capital inflow di-