Abstract
Can a country grow faster by saving more? The paper addresses this question both theoretically and empirically. In the theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic savings matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic savings does not matter for growth.
A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries.
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Notes
See, for example, Tobin (1967) and Kotlikoff and Lawrence (1981).
Thus for example Carroll, Overland, and Weil (2000) depart from convention by developing a model of habit persistence which they argue is consistent with a wide body of evidence to the effect that increases in growth precede increases in savings. We have analyzed this alternative explanation in the working paper version.
One exception in terms of growth performance in Latin America has been Chile. The average growth rate of GDP per worker in Chile between 1960 and 2000 has been almost 2 percent a year. Interestingly, its average savings rate has been 20 percent. See Prescott (2006) for more on the role of savings in the positive growth experience of Chile.
Substituting from the above expression for x it back into the aggregate production function shows that per capita GDP is strictly proportional to productivity:
This assumption captures the lower stock of knowledge of entrepreneurs in countries that are farther from the frontier. This stock could be cumulated either by adopting new technologies or by producing using them. In both cases the stock of knowledge would be proportional to A t .
Recall that her wage income was
of which she saved the fraction σ, which grew by the interest factor 1+r.Appendix II derives a closed-form solution for
See Aghion, Comin, and Howitt (2006) for a more comprehensive exploration of this hypothesis.
We are perfectly aware of all the potential problems that reduced form regressions have and will expand on that below.
If the economy were in a steady state, this would correspond to
where st − 1 is the argument of the theoretical growth equation (7).The difference in the coefficient of savings between the two samples is statistically significant at the 5 percent level.
For concreteness, in what follows we focus on the five-year regressions which are closer to the literature.
Note that, a first hint that this mechanism is unlikely to drive our results is that the effect of lagged savings on growth works through TFP growth and not through capital accumulation, as one would expect under this alternative interpretation.
A regression tree analysis suggests that the optimal cut off is similar for the split based on productivity and for the split based on financial development. We have concluded that the results are robust to the threshold used.
Obviously, our goal is not to explain cross-country FDI flows since there are many other determinants in addition to domestic private savings. The evidence from Aghion, Comin, and Howitt suggests that FDI to rich countries carries a much lower transfer of technology than FDI to developing countries.
In simulations we conduct in the working paper version, we show that indeed, habit only plays a quantitative role over the very short term and plays no role in the growth-savings relationship over the frequencies we explore in this paper.
For the rich country sample, no observations with growth above 5 percent exist.
of which she saved the fraction σ, which grew by the interest factor 1+r.
where st − 1 is the argument of the theoretical growth References
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Supplementary information accompanies this article on the IMF Economic Review website (www.palgrave-journals.com/imfer)
