Keynes’s Revenge: An Essay on the Dichotomy between Savings andInvestment in Pakistan

Pakistan’s economy may have lost its high growth rate of 6%, driven by investment and now plods at 4%, switching to consumption as its driver of growth. The earlier 6% growth was driven by investment, whereas the latter 4% growth has been majorly consumption led. Consequently, the era of investment-led growth appears to be over, possibly irreversibly As a result, consumption-led growth is now necessary. For this to be effective, consumption must be high for the consumption multiplier to work. Despite this,there is a persistent misconception that high investment is required, which necessitates a high savings rate. Pakistan's savings rate—approximately 12% of GDP—is comparable to that of Sub-Saharan Africa, prompting a search for alternative estimates beyond the SBP's reported 12%. Our findings indicate that savings are significantly higher than the 12% estimate; however, these domestic savings are not utilized for domestic investment due to outflows. This phenomenon can be interpreted as Keynes's revenge. Not only are savings a leakage from the aggregate demand within the domestic economy—consistent with the Keynesian model of the paradox of thrift—but also a leakage out of the domestic economy as outflows. As a result, they are lost to both domestic savings and domestic investment. To address this issue, we propose implementing a market mechanism to reduce these outflows of domestic savings.