IMPORTANCE OF SAVINGS AND INVESTMENT

Posted on April 21, 2015 at 12:00 PM

Sir Arthur Lewis is famous throughout the world for his contribution to economics. He was born on the island of St Lucia in the Caribbean and was Professor of Economics at the universities of Manchester, UK, Princeton, USA and the University of the West Indies.

He studied countries throughout the world and found that the ones where people saved more raised their living standards faster than other coutries with low savings. Countries that saved less than 5% of their annual income stayed poor. Those that raised their savings to more than 13% of their incomes grew richer. The same applies to families.

Why is saving so important?

Saving takes resources away from current consumption and allows them to be used for investment.

Investment is the purchase of equipment, machines and improved ways to do things which raises output and incomes.

In rural farming investment allows people to pay for better ways to do things. They can use their savings to invest in better stores for their food, so less is lost to rodents, damp and disease. This frees up time for them to do other things that increase their incomes. They can invest in better tools and equipment to raise their productivity. They can buy higher yielding seeds, fertiliser and improve their land so that crop yields rise. They can also diversify and start to grow a wider range of crops, rear animals and start their own businesses.

In the manufacturing industries investment allows firms to build better factories and employ more efficient machines and methods of production. Firms are able to invest by borrowing the savings of other people.

The banks and other financial intermediaries play an important part in this because they take the savings of individuals and lend the money to firms. The money the banks earn from this allows them to pay interest to savers, so everyone benefits.

Governments also invest. The money they raise in taxes is used to build schools, provide health care and improve roads and other transport infrastructure. Schools provide important skills which allow workers to be more productive - this is investment in human capital. Health workers keep people fit and able to play their full part in the workforce. Transport infrastructure is essential to allow producers and consumers to get to market.