The direction of causality between savings and growth remains unclear even
though it is of critical importance for development policy. In this paper,
Granger causality analysis is undertaken for seven Asian countries using th
e VECM (Engle and Granger) and VAR procedures. We find that in most cases,
the direction of causality runs primarily from growth (or income) to saving
s, although in some countries, there is also evidence of a feedback effect
from savings to income and growth. Thus, development policy should focus le
ss on promoting high savings rates and more on promoting high growth rates.
Estimation of the savings functions are presented using Engle and Granger'
s Static OLS and Stock and Watson's dynamic OLS (DOLS) procedures where app
ropriate. The high savings rates in Asia are found to be due to the high ra
te of growth of income per capita, declining shares of dependent population
, and some special institutional features, such as the high central provide
nt fund rates in Singapore. Interest rates are found to have little impact
on savings.