Is Savings a Determinant of Economic Growth in Developing Countries? (The Case of the Albanian Economy) - Economicus

by, Oltjana Zoto, Zerina Bruci

Abstract

The question of whether a savings-led economic development model can produce faster and sustainable economic growth than a consumption-led economic one or vice-versa has been one of the most difficult ones to address by policy makers and countries’ leaders worldwide. International examples of economic development show that even though the determinants of development models are similar among countries, their contribution varies from case to case. Savings is an important determinant of economic growth however extensive savings at the expense of consumption can create an economic model that produces fast growth but not sustainable in the long run (China and USA). On the other hand, the opposite also holds true. Extensive domestic demand, not met by aggregate supply, at the expense of savings also creates fast growth but not sustainable in the long run (Albania). However, more than levels of savings, it is the allocation of the capital accumulated that spurs economic development in a country ( Japan). Albania’s economic development prior to the crises was a success story of fast economic growth rates, welfare improvement and total factor productivity growth. However, the financial crises of 2008 unveiled many domestic balances that had emerged due to the consumption-led economic model the county’s incapability to increase supply. This produced fast but unsustainable economic growth. The new Albanian economic model should encourage savings in order to increase the capital productivity, the driving force of economic growth in Albania since 2000s; allocate credit available to priority sectors with comparative advantage; support export-sectors as the only way to balance the balance of payments, credit account deficits and trade deficits and invest in improving the Total Factor of Production productivity.