The saving-growth nexus in the South African Economy

Abstract

Since the early 1980s the South African economy has experienced a fall in aggregate saving, which has been criticised by the country's monetary authorities as a deterrent to growth. Although this decrease initially coincided with a phase of weak economic performance, South Africa has witnessed a resurgence of non-negligible economic growth rates in the last decade. Nevertheless aggregate saving has further lessened owing to the deterioration of private saving. Such discrepancy between saving rates and growth is in contrast with most growth theories, which argue that saving is a crucial contributor to growth. Furthermore the South African economy has been gradually liberalised since the early 1980s and, according to the McKinnon-Shaw model, should have therefore experienced a rise in saving rates. This paper examines the causal relationship between saving and economic growth in South Africa over the period 1965-2007. The study makes use of long-run regressions, unit root tests, error correction models and granger causality tests for empirical testing. The study pays particular attention to the relation between saving and economic growth and assesses the impact of financial liberalisation on South Africa's saving behaviour. Results suggest that saving has not been a fundamental driver of growth in South Africa and that financial liberalisation has inhibited private saving. Nonetheless the study supports that financial liberalisation has been conducive to higher growth, mostly through important inflows of foreign savings.