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Saving-investment Behaviour in Pakistan Essay

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Saving and investment are two key macro variables with micro foundations which can play a significant role in economic growth, inflation stability and promotion of employment especially if seen in the context of a developing country. For self-reliance and growth objectives, mobilization of domestic resources and their efficient utilization are the two major policy-oriented focuses today (Khan 1993). National savings are critically important to help maintain a higher level of investment which is a key determinant for economic uplift. Thereby, necessitating the analysis of saving-investment behavior and its determinants for policy implications; this is a demanding area because of continuing debate on the potential role of their determinants.

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In the United States, the total investment rate rose throughout the 1990s, reflecting mostly a rapid acceleration in the purchase of machinery and equipment by the business sector, notably in real terms. In contrast, the national saving rate remained flat during the 1990s, masking significant offsetting changes in the public and private sector components. As a result, the US current account deficit widened to 4.5 percent of GDP in 2000, before narrowing somewhat in the downturn.

In Japan, although both national saving and investment rates trended down during the 1990s, their levels are still well above the OECD average. Such high levels are not easy to justify, especially in the case of the investment considering the weak output growth performance. In the case of saving also, it is not clear that the substantial demographic transition ahead, together with other factors, can fully account for the high saving rate. Parallel declines in saving and investment have left the Japanese current account surplus in a range of 2 to 2.5 percent of GDP. (www.oecd.org/dataoecd/2/40/2726831.pdf).

According to this website, there are factors driving developments in investment and saving. The rise in total investment in most countries during the 1990s was largely concentrated in the business sector, where spending on capital goods accelerated sharply, especially in volume terms. In fact, after moving more or less in line with real output throughout the 1980s and early 1990s, real business investment pulled away in the following years in some Countries. The other factor is development in saving rate. After being on a trend decline throughout the 1970s and 1980s, gross national saving rates have stabilized or risen in a large number of OECD countries since the early 1990s. Notable exceptions to this pattern are Germany, where the national saving rate continued to decline until 1995 and has remained flat since then, and Japan, where it has trended down throughout the past decade, although it remains higher than elsewhere.

Developments in public-sector saving have been the dominant influence on the direction of changes in national saving in the 1990s. In most countries, both actual and cyclically-adjusted budget deficits have either turned into comfortable surpluses or at least moved in a direction that has contributed to an increase in total national saving. At the same time, the rebound in the government saving rate in the second half of the 1990s has been accompanied by a substantial decline in private-sector saving, in a few cases completely offsetting the rise in public saving.

Africa achieved relatively high growth rates in the first decade of the twenty-first century, culminating in a continent-wide average growth rate of 6.1 percent in 2007. Although rates varied across the continent, this relatively fast growth was generally shared, with several countries experiencing growth rates that exceeded their population growth rates, thus leading to increases in per capita income. This rapid growth was generally due to increased investment financed by high commodity prices, resource extraction, foreign direct investment (FDI) and inflows of other foreign resources, as well as macroeconomic stability and better economic management.( Economic Report on Africa 2010 )

According to this report, although, there is scant evidence that inflation reduction in many African countries achievements was accompanied by increased investment, economic growth and diversification, and robust employment creation in these countries. Investment increment contributed to the significant decline in inflation rates in many countries.

In Ethiopia, Foreign direct investment (FDI) has been increasing during the last ten years. Out of the total investment projects licensed during 1992-2002, FDI’s share was about 20%. Ethiopia remains an untapped and unexploited market for investors compared to neighboring countries like Sudan and Uganda. France, Germany, Italy, the Republic of Korea, Saudi Arabia, the United Kingdom and the United States are the major sources of FDI. Out of the total 392 FDI projects licensed by 2003, 12.7% were in agriculture and mining, 46.57% in manufacturing and processing, and 40.7% in trade, hotels, and tourism. (An investment guide to Ethiopia opportunities and conditions, 2004)

According to this investment guide, there is untapped and unexploited Area of investment opportunity. Basically, these opportunities are available in Agriculture and related activities, Health services, Mining, Hydro power, Tourism and Manufacturing for both domestic and abroad investors. Particularly Ethiopian investors also can invest in the financial sector in the country.

To support and appreciate investment practice in Ethiopia there is Technical and financial support. The Ethiopian Investment Commission, the Ministry of Trade, the Development Bank of Ethiopia and other government institutions provide financial and technical support for research projects, provide market information, and monitor production and export statistics for the industry. The Ethiopian Manufacturing Industries Association and the Addis Ababa Chamber of Commerce provide the relevant trade and technical information. The Government also encourages floriculture by allocating land and providing infrastructure. (An investment guide to Ethiopia opportunities and conditions, 2004)

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