Long-Run Exogeneity Between Saving And Investment: Evidence From South Africa

This paper investigates South Africa's saving-investment behaviour between 1962 and 2001. The results show that due to the unlimited nature of net capital inflows (foreign debt) from 1962 to 1976, saving and investment were not bound by a long-run solvency constraint and thus unrelated in the long run. By contrast, the limit placed on foreign debt and the low level of net capital inflows from 1977-2001 forced saving and investment to move closely together. Further investigation within a structural cointegrating VAR approach reveals that private saving is strongly exogenous to private investment from 1977-2001. The main policy implication is that prior saving matters for investment. However, the interpretation of this result departs from a neo-classical view in which an economy is 'supply constrained'. Rather, the result shows that investment spending in South Africa is balance-of-payments constrained. Policy measures should focus on lifting the ceiling that the balance-of-payments places on the expansion of demand to which supply can adapt.