The report aims at analyzing the Italian economy from the perspective of its growth over the last 40 years. The first feature pertaining to Italy’s economy as presented is its inherent Dualism, existing cause of the presence of a developed North and underdeveloped South. The decade of 1971-80 was riddled by stagflation in the country due to a series of events starting from the price and wage control policies in 1971 and the oil crisis shock in 1973. The negative effects of the price control policies, high inflation and the unprofitable growth of the companies leading to the lay-off of the workers sent the Italian economy into a downward spiral, from which it was only able to recover after a few successful policies like deregulation of some industries and relaxed control on bank interest rates.
The consequent decade, 1981-91, first saw Italy endure a period of recession which can be attributed to the continuance of the trend in 1970’s further fueled by a second oil crisis in 1979. It was only after 1983 that the country began to recover and witnessed economic expansion resulting from the effect of a few fiscal policy changes by the administration. The last part of the decade i.e. 1988-91 saw moderate economic growth and a check on unemployment while the overall growth rate settled around 2.4%.
The year 1992 marked Italy’s worst depression since World War-II where the growth rate fell below 1% and there was mass unemployment. The Italian debt too rose to unprecedented levels of 108% of GDP. The tightening interest rates due to the policies of other European countries and the instability of European markets due to the ratification of the Maastricht Treaty, 1991 were the leading causes for the depression and only after a profound reorientation in institutional, legal and economic policies leading to privatization was Italy able to strengthen its financial status.
The post 1992 period saw Italy consolidating its growth and catching up with its western European neighbors. It witnessed a growth in certain industries like motor vehicles, machinery that led to its stabilization and eventually being able to join the EMU and have a single currency being established between all member states in 2002.
The latter part of the report analyses the current scenario of Italy and the country reeling under the effects of the global recession in 2008. Lastly, for the way forward a few suggestions and recommendations have been made by our group in regards to the policies that need to be implemented in the country to foresee stronger economic growth.
Through the use of data collated from different sources, this report analyzes the macro-economic growth of Italy, a developed nation, over a period of 40 or so years. The analysis divides the economic history of Italy into certain periods, “epochs”, and concentrates thoroughly on each epoch to describe the important factors contributing to the results for that period.
The report also analyses the motor-vehicle industry with regards to a specific company, “Fiat”, in tandem to the economic growth of Italy, so as to gain further insights of the policies and the general environment pertaining in the country on one of its leading industries.
2. Political Background
Italy has a republican form of government, governed on principles set out in the 1948 constitution. The political scene is dominated by a number of parties with diverse ideologies. In the absence of a clear mandate, these parties have entered into coalitions to form the government. After being dominated by socialist forces for three decades the country saw a change in its political and economic system in the 1990s, when more liberal forces came into power. Under the leadership of Silvio Berlusconi, the present government represents a centre-right ideology. Although Berlusconi’s government commands a majority in the parliament, economic recession poses a serious challenge to it. The poor state of government finances has limited the scope for such measures.
Analysis of Italy’s present political landscape
Majority in the parliament
Developing close ties with the US
Electoral laws in need of reform
High level of corruption
3. Introduction To Study: Problems And Propositions
The purpose of this study is to critically analyze the economic growth of Italy and also identify the factors and circumstances contributing towards the economic growth. The study further divulge in examining the impact of macroeconomic factors in a business environment. The study limits itself to past 40 years and is supported by relevant facts wherever appropriate data is available.
Economic growth indicates the increase of total GDP of a country. It is measured as the rate of change GDP. It is a representation of the quantity of goods and services produced. Growth accounting explains what part of growth in total output is due to growth of different factors of production (capital, labour etc.). Growth theory helps us understand how economic decisions determine the accumulation of factors of production. Italy has witnessed a shift primarily from agriculture based economy in 1940s to a matured economy, seventh largest in the world as of 2009. It lays a foundation to understand why economies grows at different growth rate in short run and why the growth rate shrinks and try to stabilize in the long run.
The automobile industry is arguably the best indicator of an economy; its growth rate almost follows the same trend as of the economic growth. The Italian vehicle industry is dominated by the Fiat Group (Fiat and its subsidiaries), that is present in all segments of the industry from mass production to niche segment manufacturing. In 2001 over 90% of all vehicles produced in the country were made by one of the group’s core brands, Fiat, Alfa Romeo, Lancia or its truck-making division Iveco. Much of the remainder was made either by Fiat-owned companies or manufacturers in alliances with the Italian giant. Fiat’s share in the automotive market has seen a steady decline due to market expansion and a large number of competitors as well (market share of 80% in 1920, 62% in 1984, and 41% in 1998). But, still it is the single largest organization in the Italian automobile industry. Therefore Fiat can be considered a fair representation of the automobile industry, which has a vital contribution to the Italian economy.
This study represents and tries to reflect and examine the various concepts of the macroeconomics. The historical data has been analyzed and inferences are drawn to substantiate the harmony between concepts and real world. The study reflects the contribution of technology, capital and labour towards the growth of an economy. It also builds behaviour between unemployment and inflation. The study also reflects the control of exchange rates on the economy. While concluding the study a relationship between economy and automobile sector is laid. This hypothesis is analyzed with the growth of Fiat and the automobile market also.
4. Features And Periods Of Italian Economy
Dualism In The Italian Economy
Dual economy: Adual economyis the existence of two separate economic systems within one country. The Dual economies are common in less developed countries, where one system is geared to local needs and another to the global export market, or a developed country with a slightly undeveloped part. Dual economies need not be across economic sector boundaries. Italy is example of such an economy
The main characteristic of the Italian economy in the post-war period has been a series of profound dualisms: between the industrialized North and the underdeveloped South, the public and private sectors, and large industrial enterprises and small family-ran firms. Economy in Italy in the southern regions is little less developed as compared to the industrial north, owing to the extensive agricultural activities carried out by a section of the country’s population. This is an area which is responsible for unemployment of more than 20 percent. The northern part of the country concentrates with capitalistic economy, where the private sector companies account for the total productivity and profitability.
The often spectacular growth of the economy just as often exacerbated internal divisions. The rise of the Northern industrial complex largely depended on internal migration and wage differentials between the North and the South. Highly politicized attempts of the state to mitigate discrepancies of regional (under)development resulted in public sector inefficiencies and redundant industrial projects. Support of large public and private corporations perpetuated the rigidities of the internal labour market and indirectly encouraged the surge of an informal economy where labour had remained unregulated until the early 1990s.
One of the possible reasons is that North Italy is close to the rest of Europe. It can interact with other countries quite well where as South Italy is far away from the rest of Europe and is hence a little less developed comparative to North Italy. Another thing is presence if more Human capital in North Italy. Environmental conditions and infrastructure also supports the North Italy and these are the reasons of this. Enormous differences still exist between the regions,
the northeast being by far the most dynamic. Overall, despite some progress in certain areas of the so-called Mezzogiorno1, which includes the south and the islands of Sicily and Sardinia, the north-south gap is still huge. According to Istat (Istituto Nazionale di Statistica) the underground economy accounts for 15% of GDP, but the most recent IMF estimate puts this figure at 27% of GDP. Underground businesses are widespread in agriculture, construction and services. There are few large private companies in operation, but those play a major role in the economy. The strongest components of the economy are the clusters of small and medium-sized, family-owned companies in so-called industrial districts, mostly in the North East and the Centre of the country. With the exception of firms in the machine tool industry, most small and medium-sized companies (SMEs) produce high-quality consumer goods, including clothing, furniture, kitchen equipment and white goods. Despite being traditionally export-oriented, SMEs face the serious challenge of global economic integration and increased competition. After World War II, in an attempt to develop the Mezzogiorno(south), the region that starts south of Rome and ends in Sicily, the Italian Government spent billions of dollars southward for ambitious public works projects. But instead of spurring development, the Cassa per il Mezzogiorno, as the fund was known, succeeded best at spawning more corruption and mismanagement. Many of the jobs it created had evaporated by 1993, when the fund was shut down under a cascade of scandals. Italy is also known as the real sick man of Europe due to the fact that the economic growth of South Italy is a parasite for the growth of rest of the Europe. This co-existence of high wage and low wage sectors is the defining feature of labour market dualism, the generalization of which is labour market segmentation. Besides real wages being higher in the good jobs, dualism and segmentation require that access to the good-job segments be restricted in the sense that not all who want to work in those segments are able to.
Composition of employment
18.7 % in 1993 to 21.41996
More than 93%
A particularity of the Italian industry if compared with other EU countries is the small percentage of firms that adopt product innovation if compared with the high share of firm that introduce process innovation. This feature can be also found in the Mezzogiorno, where the gap in product innovation with the rest of the country is deep, while is modest for process innovation.
Impact of household saving and debt on economic growth
When there is a positive change in the level of production of a country’s goods and services over a certain point in time, it is referred to as economic growth. It is also influenced by many factors but one of the pinnacles of economic history is the impact household saving and debt has on economic growth. Most working papers and journal articles on cross countries studies assume a positive relationship between household saving and economic growth and an adverse relationship between consumer debt and economic growth.
The difference between a household’s disposable incomes (primarily wages obtained, proceeds of the self-employed and net property returns) and its consumption (spending on products) is known as household saving. When the household saving is divided by household disposable income, the household savings rate is computed. When a household uses more than it obtains as expected income and funds some of the spending through credit (growing debt), through returns coming from the sale of resources, or by making cash and deposits, there is usually a negative savings rate.
These discrepancies are fairly due to institutional distinctions between countries. These include the degree to which old-age pensions are financed by government rather than through personal savings, and the level to which governments offer insurance against sickness and unemployment. The age composition of the population is also significant, as the elderly tend to run down financial assets obtained during their working life. This implies that a country with an ageing population will generally have a low household saving rate.
The conformist view is that savings contribute to higher investment and hence higher GDP growth in the short run (Bacha, 1990; DeGregorio, 1992; Jappelli and Pagano,1994). The central idea of Lewis’s (1955) traditional development theory was that increasing savings would accelerate growth. Kaldor (1956) and Samuelson and Modigliani (1966) studied how different savings behaviors induced growth. On the other hand, many recent studies have concluded that economic growth contributes to savings (Sinha and Sinha, 1998; Salz, 1999;Anoruo and Ahmad, 2001).
Over the last 10-15 years, household saving rates have increased in Austria, Germany and Sweden and remained stable in Belgium, France and Switzerland. A downward trend over the same period has occurred in Canada, Italy, Japan, Korea, Poland and the United States. (OECD (2010), National Accounts of OECD Countries, OECD, Paris)
The main factors contributing to differences among countries are listed below:
The income effect: in general higher income leads to a higher saving rate;
The wealth effect: profits or losses on financial and non-financial assets and liabilities affect built up wealth, and thus probably expenditure, but not on income. Higher wealth may then lower the saving rate;
Credit facilities: in countries (e.g. UK and US) where consumption credit was easier to finance, saving rates may be comparatively lower;
Institutional factors such as differences in social security schemes, especially pension schemes and the tax system;
The proportion of own-account entrepreneurs and small unincorporated enterprises, within the household sector, because producers may have a different saving behaviour;
Households’ expectations as regards the future economic situation;
Cultural and social factors.
Edwards (1995) observed the determinants of world savings and argued why saving ratios were so irregular across countries. By using panel data for 36 countries, from 1970 to 1992, private and government savings are differentiated. Per capita growth is one of the most fundamental determinants of both private and public savings by using instrumental variables estimation methods. It has been found that social security systems monitored by government have a negative impact on household savings and it shows how public savings have the tendency to be higher in countries with lower political instability. The higher the government savings, the higher the private savings get crowded out.
Jacobson, Lindh and Warne (1998) showed evidence that the link between the financial sector share, private savings and growth in the United States 1948 to 1996 is categorized by some regime shifts. The result bases itself on vector auto regressions on quarterly data that allow for Markov switching regimes. There is strong evidence that the proposition that the financial development and growth operate step by step gradually.
Hondroyiannis (2004) analyses the long term and short term causal factors of aggregate private savings in Greece using data for the time frame of 1961-2000. By considering the financial and demographic advances during this phase, the long run savings utility which is susceptible to real interest rate, public funds, liquidity, old dependency ratio and fertility changes, is approximated on the foundation of an absolute life-cycle hypothesis. The significance of short-run divergences is obtained using vector error-correction model estimation. The empirical evidence proposes the continuation of a stable long-run savings function in Greece both in the long- and short-run periods and the policy inferences of such an association are accessible.
According to Barba and Pivetti (2008), rising household debt in USA made low wages and increasing aggregate demand to arise simultaneously. In the USA, according to the figures of the Federal Reserve Board, consumer credit outstanding reached 25% of disposable personal income (DPI) in 2006. This was the peak of an upward trend that has characterised the period since the first half of the 1980s, following 15 years during which the consumer credit-income ratio averaged around 18%. Increasing household debt in developed countries like USA has been mostly due to the noticeable fall in household savings and this had an adverse effect on economic growth.
Salotti (2009) claims that the current account is inclined by changes in US private savings which aid to generate and maintain world imbalances. A panel of 18 developed countries for the time dimension of 1980-2005 is used to check this claim by examining the components of total household savings. They merge two lines of literature: the first line from consumer theory, bearing in mind particularly the `wealth effect’, the second line from aggregate private savings theory. Unit root and “cointegration” tests are performed to evaluate the most suited method for estimation of the long run savings function and to derive the “cointegrating” relationship. The group means FMOLS is exercised to approximate the model. The empirical evidence goes in line with the theory where a rise in wealth should adversely affect the household savings. In addition, when significant descriptive variables, such as national savings and populace dependence ratios, are incorporated in the model, material wealth becomes the only type of wealth to (inadequately and negatively) control household savings in developed countries.
Howitt, Agnion, Comin and Tecu (2009) wanted to test if a country can grow more rapidly by saving further as they believe that household saving is of deep concern as it allows entrepreneurs to undertake their business and also reducing the agency cost that usually acts a hindrance for foreign investors. Since domestic saving counts for improvement, and consequently growth, it thus allows the home industrialist to put equity into this joint enterprise, which reduces an organization setback that would else discourage the foreign shareholder from contributing. In rich countries, domestic entrepreneurs are already known with limit know-how and consequently do not need to draw foreign outlay for investment, so domestic saving is not important for growth. The higher the household savings and the lower the household debt a country has, the more economic growth it can at least forecast to make. The finding is based on a cross-country non-overlapping panel over the period from 1960 to 2000. They use a sample of 118 countries, all those for which there exists data on per-worker GDP and on the saving rate. The cross-country regression shows that lagged savings is positively related with productivity growth in poor countries but not in rich countries.
Bhaskara (2011) examined if the mortgage equity withdrawal (MEW) mechanism is a good way to justify the great falls in the US household saving ratio over the previous twenty years. House price inflation, stock prices and mortgage rates are determinants of MEW. A VEC model with the above four variables mentioned is thus estimated. According to the impulse response report, when the prices of assets rise, the saving ratio usually falls and when mortgage rates rise, it rises as well.
Wah and Chor Foon (2011) tried to measure the dynamic link between private domestic investment (PDI), the user cost of capital, and economic growth in Malaysia over the period of 1970 to 2009. The PDI, the user cost of capital, and economic growth are “cointegrated” in Malaysia according to the “Johansen cointegration test”. The Granger causality test shows that there is a uni-directional causality running from PDI to economic growth and also from PDI to the user cost of capital in the long run and there is a bi-directional causal relationship between economic growth and the user cost of capital in the long run.
2.0 EMPIRICAL EVIDENCE Empirical evidence deals mainly with the previous works of various authors all around the world. There have been many works carried out by different authors and they reached certain conclusions which may be further developed and their results vary among the countries. The first case considered is on the United States of America (USA) and then they further scrutinise what happened in the developed and emerging countries.
2.1 STUDIES ON THE USA As noted in Thomas and Towe (1996), research into household saving/consumption behaviour in recent years has inclined to centre on probing for long-run relationships between saving (or consumption) and selected macroeconomic variables. In large part, this shows the fact that the data involved have been found to be non-stationary. This implies that conventional statistical methods cannot be used to test relationships between movements in the savings rate and other (non stationary) macro variables. This approach also implies that short-run movements in the savings rate may be driven by deviations from the long-run relationship between saving and its fundamental determinants.
Callen and Thimann (1997) studied the empirical determinants of household saving in USA using cross sectional and panel data from 21 OECD countries for 1975-95.) They find that household saving fell from 13% during 1975-81 to only 11% in 1982-89 but it has then stayed stable in general. Variables that capture the structure of the tax system and the financing and generosity of the social security and welfare system are added to the set of potential explanatory variables. The results indicate that there is an central role for public and corporate saving, growth, and demographics in controlling household saving, while some role is also established for inflation, unemployment, the real interest rate, and financial deregulation. The results also propose that the tax and the social security and welfare systems have an important impact on household saving
Bérubé and Côté (2000) examine the structural factors of the household savings rate in Canada over the previous 30 years, using co integration techniques. The main result is that the real interest rate, expected in¬‚ation, the ratio of the all-government ¬scal balances to nominal GDP, and the ratio of household net worth to personal disposable income are the most significant causal factors of the trend in the personal savings rate, as calculated in the National Income and Expenditure Accounts (NIEA). The outcomes also recommend that the fast fall in the NIEA personal savings rate in current years mainly shows a change in the trend constituent of the savings rate, rather than a temporary different approach from the trend.
Tipett (2010) uses many methodological approaches and draws on “longitudinal data from the National Longitudinal Survey of Youth 1979 and also uses multilevel logistic regressions to investigate the relationship between the hypothesized mechanisms and the probability of holding non-collateralized debt. Analysis of Survey of Consumer Finance data shows that the amount of household debt increased faster than household asset increases (see also Bucks, Kennickell, Moore, Fries, and Neal 2006; Kennickell 2009), and Keister (2000) shows that overall wealth has been growing at the same time that the percentage of households with zero or negative net worth has also been rising.
Saltz (1999) analysed the causal relationship between savings and growth rate of real output for a group that includes eighteen Latin American and Newly Industrialized countries between 1960 and 1991. The author established that higher growth rate of real output causes higher growth rate of savings
Sajid and Sarfraz (2008) analysed the causal relationship between savings and output in Pakistan by using quarterly data for the period of 1973:1 to 2003:4. The authors had recourse both co-integration and the vector error correction methods and found that bi-directional long run correlation exists between savings and output level. Furthermore, the results showed that there is a unidirectional long run causality from public savings to output (GNP and GDP), and private savings to gross national product (GNP). Moreover, the long run results backs the capital fundamentalist’s point of view that savings lead to the level of output in case of Pakistan.
2.2 STUDIES ON DEVELOPED ECONOMIES Carroll and Weil (1994) present “Granger”-“causality” tests for 38 countries for which they have fine data, and show that increases in growth radically head increases in saving. Dekle (1993) presents comparable “Granger” “causality” regressions for a group of fast-growing countries and finds that growth positively “Granger”-causes saving in every country in his sample. According to Verma (2007), the regression results favours the Carroll-Weil hypothesis that it is not savings that causes economic growth, but instead, it is rather growth that triggers savings in India
Edwards (1995) looked at data from a panel of 36 countries over the period 1970-92. Using lagged population growth, openness, political instability, and other lagged variables as instruments, he concludes that the rate of output growth has an important, positive effect on saving.
Andersson (1999) believes that the worldly interdependence between saving and output has been measured in recent empirical studies which obliged some authors to question the conventional idea of a “causal” chain where saving precedes growth via capital accumulation. As divergent to the previous studies, which have mostly used panel-estimation processes, the tests of “causal” chains are performed in time-series sets. Saving and GDP are approximated in” bivariate vector autoregressive or vector error-correction models” for Sweden, UK, and USA, and tests of “Granger non-causality” are executed within the estimated systems. The core results shows that the “causal” chains linking saving and output vary across countries, and also that “causality” linked with amendments to long-run dealings might go in diverse directions than “causality” associated with short-term instabilities.
Alguiacil, Cuadros and Orts (2002) have used the Granger non-causality test procedure developed by Toda and Yamamoto (1995) to observe the saving-growth nexus in Mexico. The causation analysed between national saving and domestic income found in recent empirical studies proved to be contradictory since there was proof in favour of Solow’s model which forecasted that there would be higher economic growth with higher savings. If foreign direct investment (FDI) is added to the model, there is greater evidence about the causality of the saving-growth nexus in Mexico since FDI increases economic growth and strengthens the relationship between savings and economic growth.
Jappelli and Padula (2007) reconsidered savings inclinations in Italy, summarizing existing empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has fallen considerably, although Italy continues to class above most other countries in terms of saving. The microeconomic data show a strong correlation between the propensity to save and the level of current income, as well as a strong correlation between income and indebtedness. International panel data put forward that saving is robustly linked with the growth rate of income, and that saving changes parallel growth change, as shown by Attanasio, Picci and Scorcu (2000) using the 150 countries of the World Bank Saving Database.
2.3 STUDIES ON EMERGING MARKETS Emerging markets are economies which are currently in the process of fast growth and industrialisation. There are at present 28 emerging markets in the world with the economies of China and India being considered certainly as the two largest. New conditions were surfaced in recent years to portray the largest developing countries such as BRIC standing for Brazil, Russia, India, and China.
The relationship between savings and economic growth has received increased notice in recent years especially in developed and emerging economies [see Bacha (1990), DeGregorio (1992), Levine and Renelt (1992), and Jappelli and Pagano (1994)]. This might not be distinct to the central foundation of Lewis’s (1955) traditional development theory that increasing savings would accelerate economic growth. Research efforts by Kaldor (1956) and Samuelson and Modigliani (1966) examined how different savings behaviours would induce economic growth.
Jappelli, Tullio and Marco Pagano (1994) test whether the measures of liquidity
constraints help to explain the international differences in national saving rates, as forecasted by their model. They also test an outcome of that model, namely that the effect of growth on saving is greater where liquidity constraints are more determined. The data cover a panel of 19 countries (all the main OECD countries are included) and are drawn from Modigliani . Observations are averages of annual data for three periods: 1960-1970, 1971-1980, and 1981-1987). Findings show that the two variables are negatively linked (the correlation coefficient for the entire sample is -0.55). They have empirically measured the soundness of three propositions, namely that liquidity constraints on households raise the saving rate, strengthen the effect of growth on saving, and promote productivity growth in models in which growth is endogenous.
Caroll and Weil (1994) used five year averages of the economic growth rate and savings for OECD countries and found that economic growth “Granger” caused savings. However, the reverse was obtained when dummies were included in their estimation. Using “Granger” “causality” tests, findings by Sinha and Sinha (1998) and Sinha (1999) found that economic growth rate “Granger” caused the savings growth rate for Mexico and Sri Lanka respectively.
Using cross section data between 1960 and 1997 and “Granger” “causality” methodology, Anoruo and Ahmadi (2001) observed the causal relationships between the growth rate of domestic savings and economic growth for seven African countries -namely Congo, Cote d’Ivoire, Ghana, Kenya, Nigeria, South Africa and Zambia. Their studies established that savings are co-integrated in all of the countries except for Nigeria and that economic growth “Granger”-causes the growth rate of domestic savings for all the countries considered except Congo where reverse “causality” was obtained.
Matos (2002) used among other parameters, the ratio of residents’ funds deposited in the financial system to aggregate monetary asset M2 (1947-2000) as a proxy of financial development, empirical tests support the view that it is vital to maintain the public’s confidence in domestic financial assets to improve GDP growth prospects. This ratio may reflect an intangible asset of the financial intermediaries, i.e. the general public’s confidence that contracts between customers.
Kwack and Lee (2005) investigate the extent to which income growth and uncertainty and demographic factors affect the domestic real saving rate in Korea. They test an extended life cycle hypothesis and demography hypothesis with Korean time series data from 1975 to 2002. The results of the tests show that the aggregate saving rate is positively affected by the moving average of the growth rate of income and the variance of the income growth. The positive effect of the income growth differs from the negative effect found household survey data were used. The young and the older age dependency ratios have negative effects on the saving rate, suggesting that the age structure of the population has an impact on aggregate saving rates.
Adebiyi (2005) employed quarterly data spanning between 1970 and 1998 to examine savings and growth relationships in Nigeria using “Granger” “causality” tests and impulse response analysis and concluded that growth, using per capital income, is sensitive to, and has an inverse effect on savings.
Mohan (2008) believes that household savings in India has contributed significantly to its economic growth which recorded a steady rise over the last decades. Mohan found some empirical relations whereby in the argument that high levels of debt-GDP lead to high interest payments relative to GDP, which crowd out government capital expenditure and reduce the overall saving rate, two relationships are of critical importance: the responsiveness of changes in the saving ratio with respect to changes in the fiscal deficit levels; and the responsiveness of government capital expenditure to changes in the level of interest payments. Mohan (2006) experienced the path of “causality” between economic growth and savings in different economic income classes. The ADF test indicates that both log GDP and log GDS have unit roots in the level data. In the presence of unit roots, the variables need to be differenced in order for the series to be stationary. Without differencing the data, a “causality” test would lead to misspecification.
To examine the “direction of causality” between saving and economic growth in Nigeria during the time frame 1970-2007, Oladipo ( 2009) used the “Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996) TYDL” methodology. The variables of interest for savings and economic growth are positively “co-integrated” indicating that there exists a steady long run equilibrium relationship. Furthermore, the findings also revealed a “unidirectional causality” between savings and economic growth and thus the corresponding role of FDI in growth.
In order to establish the link between economic growth and saving in Nigeria during the time frame of 1970-2007, Abu (2010) used the “Granger-causality and co-integration techniques”. There exists “co-integration” and “long-run equilibrium” between the variables savings and economic growth according to the “Johansen co-integration test”. There is also the “causality” runs from economic growth to saving, implying that growth triggers and “Granger” produces saving. Hence, the “Solow’s hypothesis” that saving leads to economic growth, and recognize the Keynesian theory that it is economic growth that leads to higher saving, is discarded.
Waithima (2008) had recourse to the Hendry Model with a two-step method to model a saving function for Kenya. It was found that a 1 percentage raise in GDP growth rate triggered a 0.5 percentage boost in household saving and the causality tests showed a unidirectional causality that runs from per capita GDP to private saving.
Agarwal (2001) examined the causality between gross domestic product (GDP) and saving for a sample consisting Asian economies. The author discovered that, in most economies causality runs from GDP to saving.