REVISITING MERCANTILISM AND KEYNESIAN J-W-HICKS HANSEN SYNTHESIS: THE DYNAMICS
OF SAVING,INVESTMENT, AND TRADE OPENNESS
VIGNES GOPAL KRISHNA PHD STUDENT
UNIVERSITY OF MALAYA, KUALA LUMPUR
Presentation prepared for the 2nd International Conference on Business and Economics at Tibet International Grand Hotel,
Lhasa, Tibet, China from 2nd to 4th June 2011.
Structure of Malaysian economy
“Backward Thinking”
Commodity based
economy
“Forward Thinking”
Mono-Dimensional
Approach
Knowledge and Technology
based economyMulti-
DimensionalApproach
Countries Ranking (2009-2010) Ranking (2010-2011)
Malaysia 24 26Singapore 3 3Brunei Darussalam
32 28
Cambodia 110 109Vietnam 75 59Indonesia 54 44Philippines 87 85Thailand 36 38
Global Competitiveness Ranking(Overall Ranking)
Countries Global Competitiveness Ranking 2010/2011
Institutions Infrastructure Macroeconomic environment
Health and primary education
Higher education and Training
Goods market efficiency
Malaysia 42 30 41 34 49 27
Singapore 1 5 33 3 5 1
Thailand 64 35 46 80 59 41
Cambodia 94 114 116 110 122 81
Brunei Darussalam
36 52 1 32 64 78
Indonesia 61 82 35 62 66 49
Vietnam 74 83 85 65 93 60
Philippines 125 104 68 90 73 97
Mercantilism Physiocratic
Schools of economic thought
Classical
Neoclassical
Keynesian
Trade balance
Time
Surplus
Deficit
Import substitutio
npolicy
Tableau Economiq
ue
Interest rate
r0
S0 Io
S
I
Reviews on Selected LiteraturesScholars Country/countries Sample of
yearsVariables Econometrics methodologies Main Findings
A) The Dynamics of Savings and InvestmentsNarayan (2005) Japan 1960-1999 Gross national
investment (% of gdp) & Gross national saving (% of gdp)
a) Unit root test (Zivot and Andrews (1992) sequential trend break model).
b) Cointegration test (ARDL test) c) Granger causality test LR test) (Boostrap simulation approach)
a) Saving and investment were integrated of order 1.
b) Saving and Investment were cointegrated. c) Positive relationship between saving and investment. d) There was a bidirectional causality between saving and investment.
Seshaiah and Vuyuri (2005)
India 1970-2002 Gross savings and investments
a) Unit root test (ADF & PP)
b) Johansen cointegration test
c) Granger causality test
d) Variance Decomposition
a) Saving and investment were integrated of order 1.
b) There was a long run relationship between S & I.
C) Positive connectivity between S & I
Vita and Abbott (2002)
1946 - 2001
Ratio of gross domestic investment to GDP, & Ratio of gross national saving to GDP.
Unit root test (ADF & PP test)
ARDL Bounds testing
Ordinary Least Squares (OLS)
a) There was a cointegration between saving and investment in US (1971 – 2001).
b) Positive connectivity between saving and investment in US (1946 -2001).
c) Correlation between Saving and investment was weakened after 1971.
Ang (2007) Malaysia 1965-2003
Ratio of gross domestic investment to GDP, & Ratio of gross national saving to GDP
test (ADF,PP, KPSS)
b) Cointegration test (ARDL).
c) Conditional ECM.
a) Positive relationship between Saving and investment.
Keynesian J-W – Hicks Hansen Approach
Physiocratic School of economic thought
Asymmetric information
Saving-Investment nexus
Mercantilism School of Economic thought
Evolutionary Economics
Meso Trajectory Phases of Innovation
Public Private Partnership projects
Animal Spirits
Origination
Diffusion
Retention
Creative Destruction
Sources : Author, Dopfer et al. (2004), and Nelson (2008)
ANALYTICAL FRAMEWORK
Metcalfe’s Law
Flow of information
Flow of information
Facilitation Fund (RM 20
Billion)
Private investment
(12.5 Billion)
Animal SpiritsFlow of
information
Construction of Highways
Construction of 300 megawatt Combined Cycle
Gas Power PlantDevelopment of land in
Sungai Buloh
Innovation in projects
Innovation in system
Innovation in products
10TH Malaysian Plan
Sources : Author and 10th Malaysian Plan Report
Meso Trajectory phases of Innovation
HSBB
Trust mark
Empirical models
Keynesian Income Identity Approach (Open Economy Framework)
Y= C+ I + G + (X-M) (1)Keynesian J-W Hicks Hansen Synthesis
I + G + X = S + T + M (2)SP = YD - C (3)SG = T – G (4)SN = Y-C-G (5)SN = I + (X –M) (6)I = ST - (X – M) (7)
SN = I + SIT
Empirical models of the study were derived from Equation (7),LRGFCFt = β0 + β 1 LRGDSt + β2LREXt + εt ……….(8)
LRGFCFt = β0 + β1 RTBt + + εt …………………(9)
World Development Indicators and Author’s computation
ECONOMETRICS METHODOLOGIES
Country Variables Unit root test
ADF
H0 : A variable has
a unit root
H1 : A variable has
no unit root
Middle income country
Malaysia LRGFCF -1.37(1)
LRGDS -0.96(2)
LREX -0.08(0)
RGFCF -0.88(0)
RTB -0.78(0)
Country Variables Unit root test
ADF
H0 : A variable has a
unit root
H1 : A variable has no
unit root
Middle income country
Malaysia LRGFCFM -4.84(0)**
LRGDSM -7.57(1)**
LREXM -5.30(0)**
RGFCF -8.24(0)**
RTB -5.14(0)**
LEVEL FORM
FIRST DIFFERENCE FORM
JOHANSEN COINTEGRATION TEST
Country Variables Null hypothesis Alternative
hypothesis
Trace test Maximum eigenvalue
Middle income country
Malaysia LRGFCFM,
LRGDSM &
REXM
r = 0 r = 1 43.64** (29.80) 22.04** [21.03]
r = 1 r = 2 11.60 (15.49) 11.50 [14.26]
r = 2 r = 3 0.10 (3.84) 0.10 [3.84]
RGFCF, & RTB r=0 r=1 22.32** (15.49) 22.22** [14.26]
r=1 r=2 0.11 (3.84) 0.11 [3.84]
JOHANSEN COINTEGRATION TEST
LR Relationship
Country Intercept/variables Coefficients Test-statistics Degree of elasticity
Middle income country
Malaysia Intercept -1.25 -
LRGDSMt-1+ 1.49 -8.51 elastic , Significant
LREXMt-1-0.39 2.52 Inelastic , significant
Country Intercept/variables Coefficients Test-statistics Degree of significance
Middle income country
Malaysia Intercept +32595.23 -
RTBt-1+1.03** -6.16 Significant (5%)
I = ST - (X – M)
LONG RUN RESULTS
Country Intercept/variables Coefficients Test-statistics
Middle income country
Malaysia Intercept 0.03 0.98
Δ LRGFCFMt-10.37** 2.22
Δ LRGDSMt-10.05 0.32
Δ LREXMt-10.13 0.33
ECTt-1- -
SHORT RUN RESULTS
Country Intercept/variables Coefficients Test-statistics
Middle income country
Malaysia Intercept -1891.75 -0.66
Δ RGFCFt-11.10** 2.20
Δ RTBt-10.81 1.78
ECTt-1-0.19** -2.68
Graphical Approach: Saving, Investment and Trade Openness
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
60 65 70 75 80 85 90 95 00 05
RGFCF RGDS REX
Malaysia
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
1970 1975 1980 1985 1990 1995 2000 2005
RGFCF RGDS REX
Algeria
0
4,000,000
8,000,000
12,000,000
16,000,000
20,000,000
24,000,000
60 65 70 75 80 85 90 95 00 05
RGFCF RGDS REX
Hungary
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
1980 1985 1990 1995 2000 2005
RGFCF RGDS REX
Kenya
Generalized Variance Decompositions (Model 1)
Period ∆ LRGFCF ∆ LRGDS ∆ LREX
1 100.0000 0.000000 0.000000
2 98.16881 1.758958 0.072229
3 98.13887 1.491211 0.369924
4 98.31523 1.173755 0.511015
5 98.49340 1.028999 0.477600
6 98.62216 0.877243 0.500594
7 98.69841 0.762802 0.538786
8 98.78334 0.672468 0.544196
9 98.84756 0.604147 0.548290
10 98.89427 0.546303 0.559424
Generalized Variance Decompositions (Model 2)
Period ∆ RGFCF ∆ RTB
1 100.0000 0.0000002 88.60620 11.393803 87.26457 12.735434 86.92776 13.072245 86.87550 13.124506 86.75379 13.246217 86.61338 13.386628 86.48568 13.514329 86.35900 13.64100
10 86.23125 13.76875
Summing UpPositive and normative analysis should be
incorporated in the discussion on the S-I nexus.
The transition from simple approach to complex approach may direct the way to elaborate the gaps between Saving and Investment in details.
Keynesian- evolutionary economics synthesis may enhance the status of nations.
References Akerlof, G.A. & Shiller, R.J.(2009). Animal Spirits: How Human Psychology
drives the economy, and why it matters for global capitalism. United States: Princeton University Press.
Ang, J.B. (2007). Are saving and investment cointegrated? The case of Malaysia (1965-2003), Applied Economics, 39(17), 2167-2174.
Dopfer, K., Foster, J. & Potts, J. (2004). Micro-meso-macro. Journal of Evolutionary Economics, 14, 263-279.
Lee, K.C., Pesaran, M.H. & Pierse, R.G. (1992) Persistence of shocks and its sources in multisectoral model of UK output growth. Economic Journal, 102, 342-56.
Narayan, P.K.(2005).The relationship between saving and investment for Japan. Japan and the World Economy, 17, 293-309.
Nelson, R.R. (2008). Economic Development from the Perspective of Evolutionary Economic Theory. Qxford Development Studies, 36(1), 9-21.
Schumpeter, J.A. (1934). Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge: Harvard University Press.
Schwartz, H. (2010). Does Akerlof and Shiller’s Animal Spirits provide a helpful new approach for macroeconomics?. The Journal of Socio-Economics, 39, 150-154.
Sinha, D.(2002). Saving-investment relationships for Japan and other Asian countries. Japan and the World Economy, 14, 1-23.
Vita, G.D. & Abott, A.(2002). Are saving and investment cointegrated? An ARDL bounds testing approach. Economics Letters, 77, 293-299.
Seshaiah, S. V. & Vuyuri, S.(2005). Savings and investment in India: A cointegration Approach. Applied Econometrics and International Development, 5-1, 25-44.
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