PATHWAYS TO GROWTH
hand, King and Levine (1994) have argued that, although capital accumulation plays an important role in explaining broad cross-country growth differentials, technological progress is possibly the major determinant of growth in most countries. However, to the extent that productivity improvements are achieved through the implementation of new techniques and processes, capital accumulation and savings will also play an additional (indirect) role in the growth process. The revived academic interest in savings and their relationship to growth has been echoed by policymakers throughout the world. Latin America has traditionally had a low rate of domestic saving and of capital accumulation. In 1980, for example, gross domestic savings were on average 20 percent of GDP for the region as a whole, slightly higher than in 1965, when they stood at 19 percent. This stagnation contrasts sharply with East Asia, where the average gross saving ratio increased from 23 percent of GDP in 1965 to almost 30 percent in 1980.2 In spite of the availability of foreign resources to supplement domestic savings during 1960-80, the average investment rate was rather low in Latin America throughout this period—gross investment averaged 23 percent of GDP. What made things worse was that for decades, savings—both domestic and foreign—were used to finance projects with doubtful rates of return. A number of authors, most forcefully McKinnon (1973,1991), have argued that the maze of distortions and regulations affecting Latin America's financial sector had a negative impact on resource allocation, the efficiency of (private) investment, and, perhaps more importantly, on productivity growth.3 The debt crisis had important consequences for the behavior of saving and investment throughout the Latin American region. During the early years of 'muddling through' (1982-87), investment was drastically reduced as a way to accommodate the sudden drying-up of capital flows (Dornbusch 1991, Edwards 1989). In the case of public investment, cuts were so deep that, in some countries, even existing infrastructure was not maintained. Although in recent years there has been a marked recovery, saving and investment ratios in most of the countries have not yet regained their pre-debt-crisis levels. To sustain accelerated growth, Latin America will require significant increases in both the volume and quality of investment. Even if, as some preliminary evidence suggests, the different structural reforms generate
1
These data are taken from various issues of the World Development Report. ' See, for example, the discussion in the World Development Report 1991.
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