Should Latin America Save More to Grow Faster?

Abstract

A widely shared view holds that there is no policy-exploitable causal connection from saving to growth because domestic saving is fully endogenous, optimally determined, or substitutable by foreign saving. Yet, abandoning these assumptions, which are questionable in the real world of frictions, leads to three channels through which domestic saving may promote growth: a real interest rate channel, whereby saving reduces the cost of capital (the sovereign risk premium) and enhances macro sustainability; a real exchange rate channel, through which saving leads to a more competitive real exchange rate; and an endogenous saving channel, whereby saving follows growth but in a less than perfectly elastic manner, thereby amplifying the effects of the first two channels. Broad-based econometric evidence supports all three channels and suggests that Latin America, a historically low growth-low saving region, would benefit from boosting its saving rate, especially in countries with recurrently weak balance of payments and persistent domestic demand pressures on the non-tradable sector.

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