Saving, Investment, and Growth: A Causality Test

Abstract

In the second half of the last century, tremendous efforts were devoted to identifying sources of economic success by a few countries and causes of failure by most. In this process a voluminous literature ranging from the neo-classical to Marxist, neo-Marxist, and dependency theories has been developed to answer the question of disparity among different countries of the north vis-à-vis those of the south. They all agree that accumulation of capital (social, human, and physical) was, is, and will remain one of the most significant problems of the third world countries - the south- for economic growth. <br />Traditionally we have assumed that risks and profits drive investment, investment drives growth, and growth, in turn, is the driving force behind saving. More income leads to more savings. In this study, using Iranian data, a causality test has been performed to ascertain whether this sequence is true. We found it is not the case, and saving precedes investment. If so, macroeconomic policies must be directed as increasing saving to foster further investment and economic growth and not the other way around.