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

vignesgopal@yahoo.com

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.