The Virtuous Economic Growth Cycle:An Empirical Evidence based on Developing - 8 Countries

Abstract

Purpose: The study aims to explore the factors shaping the pace of economic growth in countries, particularly in the context of Developing-8 (D-8) countries. The study seeks to address the ongoing discussion about the direction of causality between savings and economic growth, drawing parallels with the classic “egg or chicken first” question.
Methodology: Analyzing established growth models like Harrold-Domar and Solow, the research examines the intricate relationships among savings, labor, and growth in D-8 nations. Employing techniques such as Unit Root Test, Optimal Lag Length Selection criteria, Multicollinearity Test, Cointegration Test, Granger Causality Test, Impulse Response Function, and Variance Decomposition, the study uncovers the hidden patterns of interaction.
Findings: Contrary to the unidirectional causality proposed by earlier growth models, the study finds a more complex relationship among savings, labor, and economic growth in D-8 countries. Instead of a straightforward causal link, the study observes the presence of a “positive feedback loop” referred to as the “virtuous cycle.” This implies that in these economies, both economic growth (GDP) can drive savings and increased savings can foster economic growth.
Practical Implications: The findings overturn conventional wisdom, emphasizing a more intricate, interdependent relationship. This revelation carries vital implications for comprehensive economic strategies within D-8 countries, underlining the necessity of a holistic approach that integrates both saving and growth factors for sustainable economic advancement.
Value/Originality: The study’s uniqueness stems from its exploration of the savings-growth interplay in the context of D-8 countries. By introducing the novel concept of a positive feedback loop, it adds a fresh dimension to ongoing debates and significantly enriches the comprehension of economic dynamics. This perspective offers an exclusive standpoint for policy makers, researchers, and economists to consider when formulating effective developmental strategies.