ANTHOLOGY

Export Instability, Income Inequality, and Aggregate Savings: A Few More Results

RATI RAM Illinois State University and Washington State University

In a recent paper, David Lira (Economic De- velopment and Cultural Change, January 1980) investigated the effects of income inequality and "export instability" on aggregate savings rates. Using data for 64 countries pertaining to the period around 1968-73, he reported estimates for the linear regression function

S = ao + aa YINEQ + a2 E1 (1)

where S denotes national savings rate, YINEQ represents income inequality, and E1 is an ex- port instability index. The logic of the specifi- cation is provided partly by the postulate of marginal savings rates rising with income (im- plying a higher aggregate savings ratio for more unequal income distribution), and partly by the "permanent income" theory of saving which can imply a larger savings rate in the event of greater export instability (i.e., greater "transi- tory" earnings). The broad conclusion was that the estimates appeared to support both hypoth- eses: greater income inequality and export in- stability seemed to increase savings ratios.

The questions raised appear important. How- ever, variables other than income distribution and export instability also clearly affect national savings rates, and (1) seems an incomplete speci- fication. It appears useful to consider just what the pattern of estimates would be if (1) were expanded to include some other important rele- vant variables, and estimated for a sample close enough to Lim's. A moderately enriched ver- sion of (1) which, while by no means complete, seems fairly adequate for the purpose, would be

S = 13o + 131 YINEQ + 132EI + t33 Y (2)

+134G + U

where Y is GNP per capita in U.S. dollars for 1973, G is the rate of growth of GNP over 1960- 70, and U is the "standard" disturbance term.

OLS estimates of (2) are derived for a data set which pertains almost to the same period as Lim's, which has been obtained from practically the same source (mainly World Tables 1976), and which includes virtually the same coun- tries.

Since F-tests reject the hypothesis of a com- mon regression structure for the entire sample, estimates of (2) are reported for three regional samples covering Latin America, Africa, and Asia. The income distribution variable is the income share of the top 5 percent. Figures in parentheses are the relevant t-statistics, and N indicates sample size.

Latin America

S = 3.436 + .204 YINEQ - .457E1 + .00867 Y + (.78) (1.67) (-1.47) (4.77)

.692G (1.32)

/ ~ 2 = . 64 N = 18

Africa

S = -8.105 + .123 YINEQ + .932EI + .0139 Y + (- 1.08) (.67) (3.26) (2.34)

1.328G (1.17)

~ 2 = .65 N = 12

Asia

S = - 5.787 +.712 YINEQ + .292EI- .00068 Y + (-1.79) (4.92) (1.63) (-.31)

.774G (1.98)

/~-2 = .83 N = 12

On the whole, the estimates appear satisfac- tory and indicate a relatively good fit. However, the income inequality variable has a statistically significant coefficient (at the conventional 5 percent level) in only one of the three regres- sions. Similarly, the export instability coeffi-

9 2

ANTHOLOGY

cient is significant in only one case, and has op- posite signs in the other two. Thus, the estimates indicate a mixed and highly uncertain position. In other words, subject to all the caveats ap- propriate to such intercountry analyses, neither an accentuation of income inequality nor great-

er export instability is likely to raise savings rates in the LDC's; contrarily, neither an im- provement in income equality nor a more stable export performance might be feared to reduce LDC savings ratios.

93