Government Policy, Saving and Growth in Latin America

The relationship between government policy, saving and growth is a complex one. Higher growth has a direct impact on saving and investment rates through the effects on the level of current and future income and on total wealth. At the same time, a favourable policy environment — that is, one characterized by low, predictable inflation, a sustainable balance-of-payments situation, minimal distortion and clearly-established, well-enforced property rights, provides a better investment climate. This will result in a higher investment rate, and through factor accumulation and a higher rate of growth of total factor productivity, a higher rate of growth overall. However, even an economy with access to foreign financing will find it difficult to finance, on a sustainable basis, a gap between the investment and saving rate much above 5 per cent of GDP. Therefore, even if a favourable policy environment results in a sharp increase in investment demand, for that investment to materialize the domestic saving rate must also increase. Thus, where the investment rate exceeds the saving rate, a policy that results in a higher saving rate will encourage a higher investment rate to materialize, and this will lead to higher growth.