A macroeconomic model of differential growth effects of national sectoral saving and foreign borrowing: an application to Thai data

Abstract

Little attention has been given to possible differences in the growth impact of individual components of aggregate saving and investment finance from both domestic and foreign sources. Essentially, the differential growth effects of national sectoral saving, namely, household saving, private business and public saving, have not been well explored. Additionally, the income growth effect of foreign borrowing has not been focused on much in available studies. The main objective of this study is to test two hypotheses: (1) individual components of national sectoral saving in Thailand have different growth effects: (2) foreign borrowing in Thailand has a positive income growth effect. Assuming a perfectly elastic supply of foreign borrowing, demand for foreign borrowing reflects an ex ante excess demand gap in the market for goods and services. A macroeconomic model of the investment-saving type and of six structural and five identity equations is developed for a small open economy facing current account deficits under a fixed exchange rate system. Based on this framework, theoretical arguments are carefully developed to rationalize the differential growth effects of national sectoral saving and the positive growth effect of foreign borrowing. The model is fitted to annual time-series data on Thailand for the period 1961-1982. The two-stage least squares technique is employed to estimate the model. Three rigorous tests of model validity are performed by using ex post dynamic simulation procedure. Judging from the good statistical fit of each equation and the results of three tests of model validity, the macroeconometric model can be regarded as a reasonable representation of the salient aspects of saving and growth performance of the Thai economy. Major empirical findings are: (1) national sectoral saving has differential growth effects in Thailand. Specifically, household saving has the largest growth effect, private corporate net saving has a negative growth effect, and public saving has virtually no growth effect; (2) foreign borrowing has a positive growth effect in Thailand; and (3) foreign borrowing does not substitute for public saving as has been argued by radical critics. This study suggests that (1) the Thai government should consider an encouragement of household saving and improvements in the allocative efficiency of private business saving and public saving; (2) foreign borrowing for investment projects should continue in Thailand.