DOMESTIC SAVINGS-INVESTMENT GAP AND GROWTH: A CROSS-COUNTRY PANEL STUDY

Standard neoclassical growth models assume that foreign savings are perfect substitutes of domestic savings in financing domestic capital thus growth rate is independent of domestic savings rates. However, these models fail to explain the divergence of growth rates between East Asian countries with higher domestic saving rates and other emerging economies. This study forwards the view that saving-investment gaps, if not domestic savings themselves, may explain to some extent the divergence of growth rates among those countries. We adopt the methodology of Aizenman et al. (2007) in calculating cumulative saving-investment gaps of 46 countries for the period of 1993-2010. Empirical analysis suggests that increasing the fraction of domestic savings in the financing of domestic capital, i.e. a rise in self-financing ratios, contributes to growth performance of countries. This finding is more pronounced for low-middle income countries and/or countries with lower self-financing ratios.