A subtle link and not always understood in half a century: A note on investment rate and economic growth

Abstract

A common recommendation to induce sustained economic growth is to dedicate increasing resources to the investment process. Curiously, according to neoclassical growth theory, the determining factor of long-term growth is technological progress and not the accumulation of physical capital. On the contrary, to postulate that the latter plays a relevant role in long-term growth implies assuming that investment is capable of generating increases in aggregate productivity, through externalities or other types of increasing returns associated, such as does the new growth theory. However, these do not seem to be the clarifications that are in mind when it is stated that “investment is the key to growth” (as is commonly stated in economic policy debates). In this sense, the purpose of this article is not to deny the existence of the link in question. In fact, it is argued that in the case of our economies, higher levels of investment and domestic savings can play a significant role in the consolidation of growth processes through their contribution to macroeconomic sustainability. On the other hand, this note aims to remember, even when this is not necessarily the case of the local economy (as illustrated quantitatively), that there are potentially situations of “dynamic inefficiency” that may be far from optimal from an intergenerational point of view.

JEL classification: D9 ; E2 ; O3 ; O4