SAVING, INVESTMENT, GROWTH, AND FINANCIAL DISTORTIONS IN PACIFIC ASIA AND OTHER DEVELOPING AREAS

Abstract

I estimate a simultaneous-equation model in which the real deposit rate of interest and the black market exchange rate premium affect saving, investment, export growth, and output growth. The estimates corroborate earlier findings that direct effects of financial distortions on saving are minuscule. Because a major determinant of saving is the output growth rate, however, I find that saving is influenced substantially, albeit i n d i r e c t l y, by financial distortions through their effects on investment, export growth, and output growth. Simulations indicate that differences in the average values of the financial distortion variables explain approximately 50 percent of the difference in saving ratios and 75 percent of the difference in output growth rates between five Pacific Asian countries and 11 countries in other developing areas. [E20, E44, F41, O11, O16] 1.

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