Abstract
This study adopts both the Vector Autoregressive (VAR) analysis and the Impulse-Response Function (IRF) to examine the importance and the effects of domestic savings and foreign direct investment (FDI) on South African economy, using data spanning over the period 1975 to 2011. While the level of domestic savings is quite low, compared to other emerging economies, South Africa has also been struggling to attract inflow of foreign resources. The form of savings in South Africa is different from the western way of savings; hence the low levels of domestic savings. The variables considered were tested for stationarity and they were all stationary before proceeding to test for cointegration and then estimate and VAR. The cointegration test revealed that there was at least one cointegrating equation; which signifies that there exists a long-run relationship among the variables. The results from the VAR Granger test of causality depicted that domestic savings lead economic growth, while economic growth leads investment. This result of the IRF also showed that while increased domestic savings is important to improve the level of economic growth in South Africa, it also leads FDI. This means that the economic environment needs to be suitable in order to attract foreign investments. The results obtained are reliable and stable as the model passes a battery of diagnostic tests. The study proposes some recommendations for policy.
Highlights
Some major economic indicators, such as inflation and economic growth, are driven by many variables including savings and inflow of foreign resources, where savings is one of the major financial indicators
We first tested all the variables for stationarity and the results showed that, while only foreign direct investment (FDI) was stationary at level, SAV, INF and gross domestic product (GDP) became stationary after the first difference
The result obtained from the diagnostic tests showed that the vector autoregressive (VAR) is stable and the results obtained in the impulse-response function (IRF) are reliable and consistent
Summary
Some major economic indicators, such as inflation and economic growth, are driven by many variables including savings and inflow of foreign resources, where savings is one of the major financial indicators. According to the two schools of thought, Keynes and Solow, while the former school believes that economic growth causes savings, the opposite is the belief of the latter, whereby changes in savings drive economic growth. Many countries seem to believe the Solow theory including South Africa, the different campaigns urging people to save (Govender, 2013). The level of savings in South Africa is quite low compared to other emerging economies (Holburn, 2011; Odhiambo, 2009) it does not mean that South Africans do not save; the form of savings is different from the western way of savings (Ismail, 2013)
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