# **_Econometric Evidence on the Saving-Growth Relationship_**

Rodrik (2000) argues that the accumulation of physical capital is the proximate source of economic growth, and in the context of standard growth theory saving is critical in order to maintain a high income per capita (Solow, 1956). In a country-study, such arguments warrant an econometric analysis of the evidence. Building on Brazilian data from IPEA, a vector auto-regression (VAR) analysis is performed in order to study whether gross or private saving positively (Granger) causes economic growth over time. A key reference for this interrelation between saving and growth in a panel setting is Attanasio (2000). The findings for Brazil are compared to those by Attanasio in Table 1.

**Table 1. Private Saving is Found to** **<u>Granger Cause Growth in Brazil</u>**

||Private saving and<br>private investment<br>_(VAR regressions on Brazil)_|Gross saving and<br>gross investment<br>_(VAR regressions on Brazil)_|Gross saving and<br>gross investment<br>_(Multi-country panel analysis)_|
|---|---|---|---|
|_Saving on Growth_|+***[+**]|+[+]|+**|
|_Growth on Saving_|+[+]|+[+]|+**|
|_Investment on Growth_|-**[-**]|-[-]|-**|
|_Growth on Investment_|+*[+*]|+*[+]|+**|
|_Saving on Investment_|+[+]|+[+]|+**|
|_Investment on Saving_|-[-]|-[-]|+**|

Source: Author’s estimations. Results in brackets for difference-estimations. Significance at 10, 5, and 1 percent levels are denoted by ***; **; *. The dynamic tri-variate model by Attanasio et al. (2000) was OLS-based with a sample of 38 countries over the period 1960-1994 — controlling for simultaneity and country heterogeneity. See Orazio et al. (2000) for another comparative study.

All except one relationship for Brazil in Table 1 confirm the findings by Attanasio (2000) — thus making the case even stronger that private saving causes growth.<sup>1</sup> The finding is robust to the measure of saving being either gross or private. Cumulative impulse response functions from the VAR model further support the positive growth-implications over time of an increase in private saving.<sup>2</sup> Private saving is found to positively but insignificantly affect investment; growth significantly increases investment; and if investment increases in the short term, growth may fall since output is used for long term investment rather than consumption—over the long term investment positively affects growth. These relationships for Brazil conform well to the established macroeconomic literature.

# **_Econometric Evidence on Aging-Saving Relationship_**

Standard life cycle models generate a strong link between the age composition of the population and private saving. Also, cross-country econometric studies using aggregate time-series data reveal correlations between saving rates and demographic structure broadly confirming LCH predictions; countries with more elderly populations tend to have lower saving rates (Graham, 1987; Koskela and Viren, 1992; Masson et al., 1998; and Miles, 1999).

The international evidence on whether saving follow the LCH is mixed if low and middle-income countries are also considered — and highly dependent on how income is estimated. Households do not seem to run

> 1 In a separate VAR model where public saving and the old-age dependency ratio are included in the equation system, the result still holds. These supplementary results are available upon request.

> 2 There is one important caveat of this analysis, however. The data on public and private saving in Brazil is not as reliable as one would hope. The period 1984 to 1994 are somewhat unreliable, because the public and private saving were not available from IPEA, and this is the period where public and private saving is then seen to display a spike. The IMF is as the source for public saving within this period. On the other hand, Morandi (1998) finds a similar spike in private saving, though smaller. Oliveira et al. (1998) find a similarly smaller spike within this period.

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