Household Saving Behavior in the Developing Economies: The Indonesian Case

Abstract

Econometric research on the determinants of household saving based on micro data drawn from the less developed countries has lagged far behind the pace set in advanced nations. It would appear that there has been limited hypothesis-testing in the LDC's beyond macro formulations of the consumption function. Furthermore, very little of the development literature attempts to isolate the impact of structural change on aggregate personal saving, since few studies provide meaningful disaggregation. This state of affairs seems paradoxical, given the currency of W. A. Lewis's remark that the central problem in development theory is to explain an increase in domestic saving from 4 or 5 percent of national income to 12 or 15 percent.1 The dearth of empirical evidence on household saving appears all the more peculiar, given the current emphasis which marginal savings rates enjoy in a flourishing crop of growth models. Most of these ignore the sectoral components of savings, with their divergent behavior, and concentrate instead on aggregate savings performance. Per capita income, which is introduced as the independent variable, is required (a) to capture virtually all of the distributional changes underlying the growth process, and (b) to capture changes in other variables which have a significant impact on savings behavior, whether of households, corporations, or governments. The recent, and highly aggregative, Chenery-Strout model is just one example ;2 most growth models make aggregate domestic savings a simple function of per capita income, either current or lagged.3 On the one hand, this approach may yield simple, well behaved models and reasonably useful short-run forecasts. On the other hand, it offers only limited insight into the development process and contributes little to the policymaker who seeks to understand the savings decision and how he might act upon it. Furthermore, household saving is usually left in the background, while the government and corporate sector receive attention as the major contributors to high marginal saving rates. This state of affairs, if we have described it fairly, certainly cannot be