Does financial reform increase or reduce savings ?

Using Principal Components, the authors construct a 25-year time series index of financial liberalization for each of eight developing countries: Chile, Ghana, Indonesia, the Republic of Korea, Malaysia, Mexico, Turkey, and Zimbabwe. They use it in an econometric analysis of private saving in those countries. They find that the pattern of effects differs across countries. In sum, liberalization seems to have had a significant positive direct effect on saving in Ghana and Turkey and a negative effect in Korea and Mexico. No clear effect is discernible in the other countries. There is no evidence of significant, positive, and sizable interest-rate effects. Their results must be taken as an indication that there is no firm evidence that financial liberalization will increase saving. Indeed, under some circumstances, liberalization will be associated with a drop in saving. All in all, it would be unwise to rely on increased private saving as a channel through which financial liberalization can be expected to increase growth. Instead, improved resource allocation must be the primary channel.