Summary: The 1990s have seen renewed interest in themes of economic growth and development. This is a welcome change after a decade and a half during which macroeconomics was dominated by a concern with short-term adjustment and stabilization issues -- and basic problems of growth, capital accumulation, and the generation of savings were largely ignored. The authors draw three general lessons from recent literature on saving, investment, and growth: 1) Despite empirical evidence about virtuous circles of heavy saving and investment and rapid growth, the relationship between the three is complex, with causality running in several different directions; 2) Still, saving often seems to follow, rather than precede, investment and growth, contrary to the Mill-Marshall-Solow interpretation; and 3) investment and innovation are the centerpieces of growth. In this regard, the new literature on growth represents a decided (if unintended) return to tradition initiated by Marx, Schumpeter, and Keynes. Saving may not be the chief driving force behind growth, but ensuring an adequate savings level must remain a central policy concern -- to ensure enough financing for capital accumulation and to prevent inflationary pressures or balance of payments disequilibria or both. And encouraging private saving may be essential to expand investment, considering capital market imperfections and liquidity constraints on firms and households in many developing economies. Four policy conclusions emerge: 1)Public savings does not crowd out private savings one-to-one, so increasing public saving is an effective direct way to raise national saving; 2) foreign saving should be allowed and encouraged to support domestic investment -- even if it also helps finance consumption -- as long as the macroeconomic and regulatory framework is adequate; 3) higher private saving should not be expected in response to the liberalization of interest rates. Market-determined interest rates will improve financial intermediation, the quality of portfolio choices, and the quality of investment -- but not necessarily the volume of savings. Pension reform may be a better way to mobilize domestic resources; and 4) potentially large externalities associated with investment would seem to suggest the need for an "activist" investment policy. But a better way to promote investment and growth is a supportive policy and institutional environment, ensuring macroeconomic stability, social consensus, and a low cost of doing business.
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