Saving, Investment and Economic Growth – Part 1 [Archives:2001/05/Business & Economy]

January 29 2001

Dr. Alexander Bohrisch*
The purpose of this article is to give a short general overview of the interrelationship between savings, investment and economic growth and to assess the situation related to Yemen with regard to savings, investment and financial intermediation. To the extent possible, statistical data from the Central Bank of Yemen and the Central Statistical Office (CSO) were used. However, care is required when interpreting saving and investment data because they may be subject to a more or less large measurement error, reflecting gaps in basic statistical information on economic activity in Yemen. Economic growth is typically measured as the annual change in total output (real GDP) or as the annual change in output per head of the population. The latter is a broad gauge to improvements in the standard of living of the population. Economic growth is a vital – albeit not sufficient – condition for lasting poverty reduction.
Historically, economic growth is a relatively recent phenomenon (and statistically evidenced for a longer period of time mainly for Europe and the United States of America). Until the year 1500 there was practically no sustained economic growth of output in Europe. This did not change much in the following centuries. Between the years 1500 and 1700 output per capita increased by a tiny 0,1% per year and between 1700 and 1820 by no more than an average annual rate of 0,2%. It is only in the last 150 years that the industrial nations experienced sustained and higher growth rates. Thus, in the United States of America, the average annual rate of economic growth per capita was somewhat more than 1.5% during 1870-1950, but rose to slightly more than 2.0% over the period 1950-1998. In fact, it is the period 1950-1973 which witnessed exceptionally rapid growth. Per capita GDP in the world economy rose at an average annual rate of nearly 3.0% and in western Europe by even 4%. These rates have since not been attained and this period is therefore also known as “Golden Age”. This performance reflected the interaction of a host of favorable factors, but an important one was the surge in rates of fixed investment in response to opportunities provided, inter alia, by technological catch-up with the United States of America.
A landmark in the research on the sources of economic growth was a study published in 1956 by Robert Solow of the Massachusetts Institute Technology, a later Nobel Price Winner. Solow developed a theoretical framework which allows us to estimate the contributions of production factors (capital and labor) and technical progress to increases in output. The growth contribution of technical progress is calculated as a residual, i.e. as the incremental output which is not accounted for by changes in the traditional factor inputs. Although based on a number of simplifying assumptions, Solow’s work highlighted the crucial role of technical progress in the long-term growth process.
At about the same time, some international organizations (UN, World Bank, ILO) also carried out economic growth studies. These studies pointed to the important role of education and outward oriented trade policies, which, in a more general way help to strengthen competitiveness and, therefore, economic growth. Thus, international trade will not only allow the import of capital goods but will also tend to strengthen the competitiveness of domestic firms, which, together with access to larger markets, will improve the growth performance of the economy.
* Dr. Alexander Bohrisch is currently with GTZ (German Technical Cooperation), Sana’a Office until June 2001. Before, he has been a senior staff member of the United Nations Conference on Trade and Development (UNCTAD), Geneva, Switzerland. The views expressed in this article are those of the author and do not necessarily reflect those of GTZ.