Foreign Capital and Domestic Savings: A Test of Haavelmo's Hypothesis with Cross-Country Data

Trygve Haavelmo [1], in a question to Professor Leontief (2, p. 1062) has suggested the following interesting hypothesis about a developing country's savings function: I(t) = a[Y(t) + H(t)], where stands for gross investment, Y for GNP and H for capital inflows. That is to say, in Haavelmo's words, investment . . . is a function of . . . income including what they get from abroad. I think, Haavelmo adds, see the implications. It means, for example, that domestic savings could be negative if H is very large. The core of Haavelmo's suggestion is, believe, that domestic savings is not a function of national income alone but is also related, inversely, with the inflow of foreign capital. To impart more generality shall alter the Haavelmo equation slightly without distorting its central message. Let us postulate l(t) = aY(t) + bH(t). From this we have domestic savings, denoted by S(t), as given by S(t) = aY(t) + b'H(t), where b' = b 1.