Exports and the Propensity to Save

Abstract

may be constrained by the maximum available supply of savings. Foreign aid supplements this and enables a faster pace of economic development. Second, in the initial stages of development an underdeveloped country may require several goods of strategic importance that it is unable to manufacture domestically because either skills or raw materials are lacking. In addition, the export earnings may not be adequate to purchase such goods from abroad. Lack of foreign exchange, therefore, slows up the economic development process. In this context foreign aid overcomes the import constraint. It has been suggested that the development process can be accelerated when the foreign-exchange constraint is removed, compared with the savings constraint. A major assumption of Chenery's model is that the ex ante savings gap and the foreign-exchange gaps are independent of one another. This assumption has been the subject of critical analysis. It has been argued that the balance-of-payments problem cannot be treated in isolation from the savings-investment problem. Alfred Maizels has argued that variations in exports might result in associated variations in domestic savings.2 Should this be correct, the two-gap * I am indebted to Professor David Felix for his encouragement in exploring the main hypothesis of this paper. He is not responsible for any errors in the analysis. I am thankful to two anonymous referees of this journal for helpful comments on an earlier draft of this paper. I am also thankful to Ling Ling Chang for help with the computer work.