PUBLIC POLICIES AND SAVING IN DEVELOPING-COUNTRIES

This paper analyzes the effectiveness of public policies in raising saving in developing countries, drawing from estimations of consumption functions for 13 developing countries. As a first step, evidence from time-series and panel data on the role of liquidity constraints affecting consumption functions is provided, suggesting that a public saving rise does not result in an equal reduction in private saving. The second step presents direct evidence on the link between private consumption and government saving based on a more general consumption specification implemented for 1980-1987 country panel data. While indirect effects of public policies via changes in domestic inflation and real interest rates on private saving are shown to be negligible, there are significant effects of public current expenditure cuts or tax hikes on private saving. However, higher public saving is offset only in part by a private saving decline - the exact offset coefficient depending on which fiscal variable is affected (taxation or current expenditure) and on the private sector's perceptions of how permanent the fiscal policy changes are. Therefore public policies play an effective role in raising national saving levels in developing countries. © 1991.